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Markets on edge as Greece struggles

A political stalemate in Greece rattled financial markets worldwide Monday, driving U.S. stocks lower.

The euro sank to a three-month low against the dollar and borrowing costs for Spain and Italy jumped as bond traders anticipated that financial stress could spread far beyond Greece. Investors dumped risky assets and fled to the Treasury market, pushing yields to the lowest levels this year.

The Dow Jones industrial average dropped 125.25 points to close at 12,695.35. The Dow has lost more than half its gains for the year in the past two weeks as worries resurface about Europe and the U.S. economy.

In Athens, talks between political parties over forming a government dragged into a second week. The uncertainty has raised concerns that Greece could miss a debt payment and drop the euro currency.

The worry is that if Greece leaves the currency union, bond traders may demand steeper borrowing rates from other troubled countries and push them deeper into debt.

The turmoil could easily spread to the United States through the banking system.

"The large banks are globally connected," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

"The concrete fear is that if Greece exits the euro, that would hurt European banks. They'll pull back lending to U.S. banks, and then they'd be in worse shape."

In other trading, the Standard & Poor's 500 index dropped 15.04 points to 1,338.35. The Nasdaq composite sank 31.24 points to 2,902.58.

The losses swept across the market. All 10 of the industry groups within the S&P 500 fell.

Major markets in Europe plunged. France's CAC-40 and Germany's DAX lost 2 percent. Benchmark indexes fell nearly 3 percent in Italy and Spain.

Traders shifted money into the safest of government bonds, pushing Treasury prices up and their yields down. The yield on the 10-year note hit a low for the year, 1.77 percent.

Since hitting its high for the year May 1, the Dow has been on a steady slide, closing lower on seven of the previous eight trading days. The Dow's 1.7 percent loss last week was its worst since Dec. 16.

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