The initial ease with which investors welcomed new leadership in both Greece and France turned to concern today that Greece, which has received two financial bailouts to avoid national bankruptcy, might soon exit the euro zone.
European demands for strict austerity measures are dividing the political parties in Greece, leading to refusals of cooperation to form a new government following the weekend's elections.
FX Concepts founder and chief executive John Taylor told Bloomberg News that Greece will probably leave the euro as soon as next month as the government runs out of cash and European institutions fail to lend more to the nation.
"This summer I think is very likely," Taylor said. "The Europeans aren't going to give them the money, the International Monetary Fund's not going to give them an OK. They will be out of money in June."
Europe's Stoxx 600 Index shed 1.7 per cent on the day at the close of trading in London, while the euro slid 0.1 per cent to US$1.3033 and weakened 0.2 per cent to 104.05 yen by mid-afternoon New York trading.
In Athens, the ASE index dropped 3.6 per cent to its lowest in more than two decades.
In afternoon trading, the Dow Jones Industrial Average sank 1 per cent, the Standard & Poor's 500 Index dropped 1.01 per cent and the Nasdaq Composite Index fell 1.04 per cent.
Investors are fleeing to the perceived safety of both US Treasuries and German bunds.
A US$32 billion auction of three-year US notes drew a yield of 0.362 per cent, compared with a forecast of 0.365 per cent in a Bloomberg survey of seven of the Fed's primary dealers. The yield on the benchmark 10-year note declined to 1.83 per cent.
Meanwhile, corporate earnings continue to lack the lustre of the season's initial couple of weeks. While first-quarter results are still ahead of expectations for about two-thirds of the US companies who have reported so far, that ratio is not quite enough to instill confidence needed to push Wall Street higher.
Today, shares of McDonalds dropped more than 2 per cent on disappointing sales, while those of Fossil plunged 37 per cent on a downgraded full-year outlook because of weakness in Europe.
"For the past six weeks or so, what's been really holding us is the earnings. Now that big earnings are out, the focus is back to Europe, at least in the short-term," Randy Warren, chief investment officer at Warren Financial Service & Associates in Exton, Pennsylvania, told Reuters.
"A break below the recent trading range suggests that if we get a pullback, we could go below our 200-day moving average of about 1,275 which is down about 8-10 per cent from here," Warren said.
The S&P 500 was last trading at 1,355.68, below the 1360-mark, considered to be a key technical point.