Wall Street fell as investors awaited Alcoa's results amid concern that Europe's debt crisis is out of control and hampering the recovery of the world's largest economy.
Spanish and Italian bond yields rose amid crystal-clear indications that the problems in Greece, onto its second international financial bailout, are far from over. The Spanish 10-year bond yield rose as high as 7.11 per cent earlier today.
The Greek economy will contract about 6.9 per cent in 2012, the same as in in 2011, and surpassing its April 2 forecast for a 5 per cent contraction, according to the Athens-based Foundation for Economic and Industrial Research.
A gathering of euro-zone finance ministers failed to spark hopes for a resolution to the sovereign debt crisis that has marred the region for more than 2-1/2 years and has hamstrung its economies.
The effects have been felt elsewhere including in the US, which will be reflected in the latest round of corporate results. Alcoa will kick off the earnings season after the market close today.
"It's very concerning," Jeff Savage, regional chief investment officer for Wells Fargo Private Bank in Portland, Oregon, told Bloomberg News.
"Seven per cent is not a sustainable level of interest rates for Spain. That's scary stuff. We can't have one of our best trading partners going through terrible economic times and not having an effect on US corporate earnings," he said, referring to Europe.
Europe's Stoxx 600 Index closed with a 0.4 per cent drop.
In late trading in New York, the Dow Jones Industrial Average fell 0.64 per cent, while the Nasdaq Composite Index declined 0.38 per cent and the Standard & Poor's 500 Index slid 0.50 per cent.
The world's key economies are struggling. The latest data showed that machinery orders in Japan dropped at a record pace in May, while inflation in China fell to the lowest level in 29 months.
That underpins the appeal of top-rated fixed-income securities, such as German bunds. Germany sold 3.29 billion euros of six-month bills at a record-low yield of minus 0.0344 per cent, according to a statement from the Bundesbank today. That's below the yield of 0.007 per cent at the previous auction of similar-maturity debt on June 11, according to Bloomberg.
The European Central Bank is keeping an open mind towards easing borrowings costs further, after cutting its key rate to a record low 0.75 per cent last week.
"We have to look at what the situation is, look at the data and the developments and then we'll make up our minds in the Governing Council about what next actions we'll do," ECB president Mario Draghi told the European Parliament when asked whether the region's central bank could continue lowering rates.