Euro, global stocks hit by fears over European banks

An employee counts Euro notes at the Bank of Taiwan head office in Taipei May 10, 2010.

NEW YORK (Reuters) - The euro dropped over 1.5 percent and U.S. stocks slid on Monday after Spain's bailout of a small bank raised concern about Europe's financial system, boosting safe-haven demand for gold and U.S. Treasuries.

Stocks had a volatile session, with the Dow and the S&P 500 sinking more than 1 percent in the final trading minutes. In Europe, however, stocks snapped a three-day losing streak as rising mining shares offset declines in bank stocks.

News that Spain's central bank on Saturday had taken over savings bank CajaSur after a failed merger weighed heavily on sentiment across financial markets.

CajaSur will now have access to Spain's bank bailout fund. Analysts worry other banks could require public funds at a time when much of Europe is struggling with massive deficits.

"The Spanish news is not really a big story, but it does highlight that there are a lot of cracks in the financial system," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto.

"The concern is that if these cracks get bigger, the question is who would be able to contain it. This is obviously a warning and we'll see if it becomes more significant," he added.

Wall Street seesawed during most of the day, with the Nasdaq rising as much as 0.7 percent during the session. But fears about Europe's ongoing debt crisis knocked down investors later on the day.

The Dow Jones industrial average .DJI ended down 126.82 points, or 1.24 percent, at 10,066.57 while the Standard & Poor's 500 Index .SPX lost 14.04 points, or 1.29 percent, to 1,073.65. The Nasdaq Composite Index .IXIC slid 15.49 points, or 0.69 percent, to 2,213.55.

Bank shares pressured the market, with the Standard & Poor's financial index .GSPF falling 2.9 percent. Shares of Citigroup (C.N) gained 0.8 percent, however, after Goldman upgraded the bank.

European trading was thin due to a religious holiday, but most markets were open. The FTSEurofirst 300 .FTEU3 finished 0.33 percent higher, after sliding as much as 0.7 percent earlier.

Shares of miners supported European markets higher as the outlook for metals improved after an Chinese official said the government should be particularly cautious in introducing new monetary tightening measures.

Plans outlined by British Finance Minister George Osborne and David Laws, Osborne's deputy, on Monday to cut 6.25 billion pounds ($9 billion) of government spending generally hurt sentiment, traders said.

Global stocks as measured by MSCI .MIWD00000PUS slid 0.7 percent, adding to last week's 4.8 percent loss.

But emerging markets stocks .MSCIEF rose 0.5 percent, as rising prices of oil and other raw materials supported the outlook for commodity-exporting countries.

U.S. crude oil futures edged up in choppy trading as some analysts said the market was oversold, but concerns about Europe curbed a sharp recovery in prices. The oil contract for July ended up 0.24 percent, at $70.21 a barrel.

EURO PLUNGES AGAIN

The euro fell broadly on Monday, as persistent concerns about the euro-zone debt situation threatened the future of the single currency.

The news wiped out last week's short-covering rally in the euro, which had been spurred by talk European monetary officials might intervene to prop up the beleaguered single currency.

The euro was down 1.67 percent at $1.236. Last week, it reached a four-year low of $1.2143.

Data showing U.S. existing home sales rose more than expected in April briefly pushed the euro to session lows against the dollar at $1.2345, according to EBS data.

"People are piling money into dollars and Treasuries, hoping they can ride out the storm," said John Canally, economist and investment strategist at LPL Financial in Boston.

Benchmark 10-year U.S. Treasury notes rose 9/32 in price, with the yield at 3.2014 percent. Spot gold prices, another safe-haven, climbed 1.4 percent to $1,191.50.

(Editing by Kenneth Barry)