The Standard & Poor’s 500 Index lost 2.2 percent to 1,106.47 at 3:18 p.m. in New York and the Stoxx Europe 600 Index sank 1.1 percent. The S&P GSCI Index of commodities fell 1.1 percent and touched a 10-month low. The euro dropped versus 13 of 16 major peers, sinking to the lowest level in more than a decade against the yen. The 30-year Treasury yield plunged 15 basis points to 2.77 percent. Costs to protect against default on European corporate debt reached an almost three-year high.

Financial shares were the biggest drag on stocks as German Finance Minister Wolfgang Schaeuble opposed moves to increase the scale of the euro rescue fund. His remarks damped speculation of a breakthrough in talks to quell the debt crisis as European officials gathered in Luxembourg amid growing international impatience following 18 months of clashes between the region’s leaders.

“Europe is still going to be the focus,” Peter Jankovskis, who helps manage about $2.2 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview.“The ’risk-on, risk-off’ trade is going to continue.”

Accelerated Losses

U.S. stocks resumed declines after briefly erasing losses following data on manufacturing industries and construction spending that topped economists’ estimates. The Institute for Supply Management’s factory index climbed to 51.6 last month from 50.6 in August, above the level of 50 that is the dividing line between growth and contraction and higher than the median forecast of economists surveyed by Bloomberg News for a drop to 50.5. The Commerce Department said construction spending increased 1.4 percent in August, defying the median forecast for a 0.2 percent drop.

Losses increased in the S&P 500 after the gauge fell below a series of levels considered significant by analysts who base investment decisions on charts. The index slipped below 1,119.46, its lowest close of the year, just before 12:50 p.m. and breached 1,114.22, the worst intraday level of September, about 15 minutes later.

“There’s reason to think that the bears will take control,” Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati said in a telephone interview. “We violated that low for the year. It could definitely lead to some accelerated selling here.”

‘Overweight Diabetic’

The S&P 500 tumbled 14 percent in the third quarter, while the Stoxx 600 sank 17 percent and the S&P GSCI slid 12 percent, with each posting its biggest drop since the fourth quarter of 2008 amid the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy.

Bill Gross, the manager of the world’s biggest bond fund, said the global economy risks lapsing into a recession because“sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” according to a monthly investment outlook posted on his Pacific Investment Management Co.’s website today.

Financial and energy companies led losses in all 10 industry groups in the S&P 500. Alcoa Inc., which will unofficially mark the start of the third-quarter earnings season next week, slid 6.9 percent for the second-biggest drop in theDow Jones Industrial Average after JPMorgan Chase & Co. cut its earnings and share-price estimates.

Bank of America, AMR

Bank of America Corp. lost the most in the Dow, declining 8.2 percent to a more-than two-year low. The largest U.S. bankby assets said that access to its online accounts was slower or halted for a second consecutive weekday because of heavy customer traffic. Company spokeswoman Tara Burke denied rumors that the slowness was the result of hacking.

AMR Corp. tumbled 33 percent on growing concern the airline may be forced to seek bankruptcy protection. A Chapter 11 filing“is certainly not our goal or our preference,” said Andy Backover, an American spokesman. “We know we need to improve our results, and we have a sense of urgency as we work to achieve that.”

All but two of 19 industry groups declined in the Stoxx 600 as Commerzbank AG, Germany’s second-largest lender, and Societe Generale SA of France dropped more than 5 percent. Dexia SA slumped 10 percent as Moody’s Investors Service placed the credit ratings of the lender’s three main operating entities on review for possible downgrade. Les Echos said finance ministers from Belgium and France are meeting today to discuss financing options for Dexia.

The Federal Reserve Bank of New York may ask foreign lenders for more detailed daily reports on liquidity as the U.S. steps up monitoring of risks from Europe’s sovereign debt crisis, according to two people with knowledge of the matter.

Liquidity Reviews

Regulators held informal talks with some of the largest European lenders about producing a “fourth-generation daily liquidity” or 4G report, according to the people, who asked for anonymity because communications with central bankers are confidential. The reports may cover potential liabilities such as foreign-exchange swaps and credit-default swaps, said one person. The U.S. has already increased the number of examiners embedded in these banks, the person said.

The Financial Stability Board backed plans for the world’s largest banks to set aside additional capital and develop measures to wind down their operations in a crisis, the group’s chairman Mario Draghi said today.

Lenders whose collapse could roil global markets will face

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings climbed as much as eight basis points to 210.5, the highest since December 2008 and approaching the record 215 basis points set that month, according to JPMorgan.

‘Avoiding Contagion’

“The big issue in the euro zone remains avoiding contagion from the all-but-inevitable Greek sovereign default,” Larry Hatheway, the head of macro strategy at UBS AG in London, wrote in a report today. We are “unlikely to get much relief from euro zone uncertainties in the coming months.”

The yield on the Greek 10-year bond lost six basis points to 22.62 percent. The yield on Italy’s two-year security fell three basis points and Spain’s increased one point as theEuropean Central Bank bought the nations’ bonds, according to four people with knowledge of the transactions. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose 2 basis points to 342.35, compared with the record high of 358.5 set Sept. 23, according to CMA.

Greek Austerity

The Greek government passed 6.6 billion euros ($8.8 billion) of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the European Union,International Monetary Fund and ECB, known as the troika. Finance Minister Evangelos Venizelos had earlier said Greecewould miss the targets and the troika accepted the new budget. Euro region finance ministers meet again Oct. 13 to decide on a sixth bailout payment.

European governments are close to resolving Finland’s demand for collateral to underpin bailout loans, removing an obstacle to Greece’s second rescue package, three people familiar with the discussion said.

The euro depreciated 1.4 percent to $1.3194, the lowest since January. The European currency dropped 1.9 percent to 101.14 yen, the lowest against its Japanese counterpart since June 2001. The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed 1.3 percent. The yen strengthened against all 16 major peers.

Treasury Spreads

Ten-year Treasury yields slid 13 basis points to 1.79 percent and the spread between five-year and 30-year securities decreased to 189 basis points, the narrowest on a closing basis since October 2009. The Fed bought Treasuries today maturing from February 2036 through August 2041, the first under a program announced Sept. 21 to buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less to keep borrowing costs down.

Among 24 commodities tracked by the S&P GSCI Index, 16 retreated. Crude oil for November delivery decreased 2.3 percent to $77.38 a barrel.

The MSCI Emerging Markets Index sank 3.2 percent, following its 23 percent plunge in the three months ended Sept. 30.

(Bloomberg News)