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Wall Street tumbles as Italy's economic crisis worsens

A trader works on the floor of the

A trader works on the floor of the NYSE before the closing bell on November 9, 2011. (Getty) Credit: A trader works on the floor of the NYSE before the closing bell on November 9, 2011. (Get

Stocks on Wall Street tumbled to their worst finish in nearly three months as the European debt crisis seemed to poison Italy, a country that may be too big to bail out.

And if the contagion spreads, the crisis could skip the pond and infect the U.S. with another recession, economists warn.

"It's bad enough that you can't protect yourself from hiding underneath the dining-room table," said Robert Brusca, chief economist at FAO Economics in New York. "You're talking about the third-largest country in Europe. That's a big enchilada, or in this case, a spicy meatball."

So why do Italy's financial problems give the impression that Rome is burning?

The yield on Italy's 10-year bond reached above 7% - a number that other European countries hit before requiring bailouts.

But as a major European economy and the eighth largest in the world, Italy may be too massive for a rescue from the European Union, which has rushed to the aid of Greece, Ireland and Portugal. Italy's debt is pegged at $2.6 trillion - five times that of just Greece.

What's more, Italy is now roiled by political uncertainty, with Prime Minister Silvio Berlusconi set to step down once the country's latest austerity package is approved, as soon as Saturday.

The domino effect if Italy were to devolve into Greece - where riots and strikes brought the country to a standstill last month - would flood the markets with panic, economists predict.

"It raises the likelihood of a global recession. The debt issue has to be settled," said oil analyst Jim Ritterbusch.

More economic jitters are in store if the euro zone - currently made up of 17 countries linked by a shared currency - breaks apart, with debt-laden ones such as Greece, Spain and Portugal severing ties, Brusca said. However, he doesn't see Germany and France, the two largest euro zone economies, succumbing to a similar fate.

Either way, what happens in Europe doesn't stay in Europe, Brusca said. Wall Street - the economic engine for the U.S. and New York City - is watching.

"If that tsunami crosses the Atlantic," Brusca said, "it gains speed here."

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