US stocks plunge after US debt warning

A currency trader stretches in front of the screens showing the Korea Composite Stock Price Index, left, and the exchange rate between the US dollar and the South Korean won at the Korea Exchange Bank headquarters in Seoul, South Korea, Wednesday, Sept. 7, 2011. The Korea Composite Stock Price Index rose 3.78 percent, or 66.75, to close at 1,833.46. AP

NEW YORK—US stocks plunged Monday after ratings agency Standard & Poor’s issued its first warning on US debt, citing Washington’s inability to tackle looming fiscal deficits.

In closing trades the Dow Jones Industrial Average was down 140 points (1.14 percent) to 12,201.52, while the tech-heavy Nasdaq Composite skidded 1.06 percent to 2,735.38.

The broad-market S&P 500 stock index shed 14.56 points (1.10 percent) at 1,305.12.

Shortly before the market opened, Standard & Poor’s revised its outlook on US sovereign debt to “negative” from “stable” – the first ever challenge to Washington’s top-line AAA grading.

Voicing strong doubts over the ability of battling Republicans and Democrats to agree a credible plan on cutting the fiscal deficit, S&P gave the country until 2013 to act or face losing its coveted rating.

“Because the US has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” S&P said.

The announcement’s impact on the market was “like a gas explosion in a mine,” Meeschaert Capital Markets analyst Gregori Volokhine said, coming as market confidence plunged in Europe over Greece’s ability to service its own massive debts.

US bond prices fell sharply after the S&P news, sending yields, the cost the United States pays for borrowing, higher.

But by 2000 GMT prices had recovered: the 10-year Treasury was yielding 3.37 percent from 3.41 percent late Friday, and the 30-year bond was at 4.45 percent from 4.47 percent Friday.

The government rejected S&P’s finding, saying the agency underestimated the political leadership’s ability to tackle the problem.

Sovereign debt worries also weighed on markets in Europe as top-level negotiations began on a bailout for Portugal, the third eurozone rescue after Greece and Ireland.

European Union and International Monetary Fund officials began tough talks with Portugal in Lisbon Monday on the terms and conditions of a bailout.