| NEW YORK
NEW YORK U.S. stocks tumbled more than 4 percent on Wednesday, almost wiping out gains from a relief rally the previous day, as rumors about the health of French banks sparked concern that the euro zone's debt crisis could claim new victims.
The rumors tapped into investors' worst fears of contagion. French bank stocks tumbled and led European and U.S. markets lower -- the Dow closed at its lowest level in almost a year. Gold hit another record high and investors pushed into U.S. Treasuries, still viewed as the safest place to park cash despite the credit downgrade from Standard & Poor's last week.
"What we're seeing here is the fear and rumor-mongering that's coming out of Europe. It eerily reminds me of the fall of 2008, where you would see one financial institution after another be lined up in the cross-hairs of the traders," said Cliff Draughn, chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.
Shares of Societe Generale (SOGN.PA), France's second largest bank, plummeted as much as 23 percent before trimming some losses to close almost 15 percent lower.
SocGen was the weakest of the major French banks in Europe's stress test of its lenders last month. Investors have speculated it may have to raise about 3 billion euros to reach new global capital standards if the euro zone crisis worsens.
SocGen denied Wednesday's market rumors and asked France's stock market regulator to open an investigation.
The intensification of worries over the reach of the euro zone debt crisis took some of the comfort out of Tuesday's promise from the U.S. Federal Reserve to keep interest rates low for at least another two years.
The Dow Jones industrial average ended down 519.83 points, or 4.62 percent, at 10,719.94. The Standard & Poor's 500 Index lost 51.77 points, or 4.42 percent, at 1,120.76. The Nasdaq Composite Index fell 101.47 points, or 4.09 percent, at 2,381.05.
Trading was once again marked by sharp moves on massive volume. For a fifth straight day, the Dow traded in a range of more than 400 points.
The broader S&P 500 is down more than 15 percent from its 2011 closing high set on April 29.
The losses came against the backdrop of worries about weak U.S. economic data, the downgrade of U.S. debt, and the inability of lawmakers to address growing worries that another recession is on the way.
The MSCI all-country world index was down 2.4 percent, while the FTSEurofirst 300 of leading European shares closed down 4 percent.
Gold racked up a third record in a row, extending its best rally since 2008. Spot gold rose near 3 percent to hit a high of $1,796.86, while futures briefly climbed above $1,800 for the first time.
"We don't see anything out there that's going to reverse the appetite for gold," said Deutsche Bank commodity strategist Michael Lewis.
"Given gold is a financial asset, it's interesting that it doesn't look that expensive at these sort of levels."
WORDS DON'T WORK
Recent selling has come despite attempts by politicians and central banks on both sides of the Atlantic to prevent or contain debt crises.
The snap back following the Fed's statement was short lived as investors saw the message as double edged. The Fed signaled it was willing to keep the U.S. economy afloat, but also acknowledged just how much trouble the world's largest economy was in.
"The sense that you're going to have a continuing accommodative policy from the Fed gave people some comfort, but concern out of the European debt situation turned things down," said Eric Kuby, chief investment officer of North Star Investment Management Corp in Chicago.
Wall Street's favorite fear gauge, the CBOE Volatility index .VIX, jumped 22.6 percent on Wednesday. It was the third session in the last five the index has jumped at least 20 percent.
Speculation that France's AAA rating may be at risk initially rattled markets, though the three major agencies reaffirmed the top-tier rating.
"I think there's concern about just how much Greek debt French banks really do hold and how much the European Central Bank is willing to backstop all this," said Bret Barker, portfolio manager at TCW in Los Angeles, which has $65 billion in fixed-income assets under management.
In late New York trading, the euro was down 1.2 percent at $1.41940 after sliding to a session low of $1.41620 on trading platform EBS.
Treasuries rose as stocks fell, with benchmark ten-year note yields trading within three basis points of their record low yield of 2.04 percent set in December 2008.
Buyers have continued to pile into Treasuries even after S&P downgraded U.S. credit rating to AA+ from top-tier AAA.
"The U.S. may have been downgraded, but in the world I live in, the United States' AA+ is still higher than Brazil's BBB-," said Jankiel Santos, chief economist at BES Investimentos, the Sao Paulo unit of Portugal's Banco Espirito Santo.
Brent crude rebounded to shake off two days of losses as an unexpected decline in U.S. oil inventories outweighed deepening economic concerns. Brent crude settled up $4.11, at $106.68 a barrel, but was still down on the week after tumbling more than 6 percent last week.
U.S. light crude closed at $82.89, up $3.59, or 4.53 percent, after falling 8.7 percent in two prior trading days. It slid nearly 9 percent last week.
(Additional reporting by Emily Flitter, Rodrigo Campos, Ashley Lau, Jonathan Leff and Jan Harvey in New York, and Jeb Blout in Rio de Janeiro; Editing by Diane Craft)