* Dow industrials fall nearly 400 points, euro off 2 pct * Italian 2- and 10-year yields rise above 7 percent By Rodrigo Campos NEW YORK, Nov 9 (Reuters) - Stocks and the euro plunged on Wednesday as Italian borrowing costs spiked, raising fears the country will be forced to seek a bailout that could overwhelm the euro zone's finances and push the region into a recession. Yields on two- and 10-year Italian bonds rose above 7 percent, a level at which the cost of financing a more than 2 trillion euro debt burden is seen as becoming unsustainable. Investors are concerned the euro zone and international lenders would struggle to assemble a bailout of sufficient size for Italy, which is the euro zone's third-largest economy. "Italy's latest debt woes signal a new, even more dangerous phase in Europe's debt crisis," said Mohamed El-Erian, co-chief investment officer at PIMCO, which is home to the world's largest bond fund and a holder itself of Italian sovereign debt.Key measures of risk aversion rose to levels not seen since last summer, when investors grappled with the initial round of the debt crisis. The search for safety lifted U.S. Treasury prices, even as yields continued to shrink. The benchmark 10-year U.S. Treasury note was up 1-2/32 with the yield at 1.96 percent. Assets perceived as risky fell. In afternoon trading in New York, the Dow Jones industrial average fell 390.37 points, or 3.21 percent, to 11,779.81. The S&P 500 lost 45.10 points, or 3.53 percent, to 1,230.82. The Nasdaq Composite dropped 100.84 points, or 3.70 percent, to 2,626.65. The KBW bank index slid 4.95 percent, and the S&P financial index was off 4.6 percent. Morgan Stanley shares fell 7.91 percent and Goldman Sachs lost 7.23 percent. World stocks as measured by MSCI were down 2.6 percent, while in Europe the FTSEurofirst 300 ended down 1.8 percent. The STOXX Europe 600 Banks index slid 3.7 percent, weighed by a 6.8 percent fall for leading Italian lender UniCredit , which holds 38.6 billion euros of Italian government debt. U.S. dollar-denominated Nikkei futures fell 2.3 percent.EURO TUMBLES Traders said the European Central Bank bought Italian debt aggressively on Wednesday in an attempt to lower yields. Mark McCormick, a strategist at Brown Brothers Harriman in New York, said the ECB may be forced to increase those purchases or to cut interest rates again next month, all of which should weigh on the euro. The ECB cut rates to 1.25 percent last week. "All of this is adding to the case for more economic weakness in the euro zone as a whole and recent manufacturing data suggests things are getting worse," McCormick said. The euro slid more than 2 percent versus the greenback and the yen and 0.5 percent against the Swiss franc .