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February 26, 2013

Stocks drop as Italy faces political disarray

NEW YORK — Stocks had their worst drop in more than three months as the prospect of political paralysis in Italy raised the specter of Europe’s debt crisis flaring up again.

The Dow Jones industrial average fell 216.40 points, or 1.6 percent, to 13,784.17, its biggest drop since Nov. 7.

The Standard & Poor’s 500 index fell 27.75 points, or 1.8 percent, to 1,487.85, dropping below 1,500 for the first time in three weeks. The Nasdaq composite dropped 45.57 points, or 1.4 percent, to 3,116.25.

Stocks had rallied in the early going as exit polls showed that a center-left coalition in Italy that favored economic reforms in the euro region’s third-largest economy was leading. That gain evaporated after a later poll predicted that the elections could result in a stalemate in the country’s legislature. The losses accelerate in the late afternoon as partial official results showed an upstart protest campaign led by a comedian making stunning inroads.

“There was confidence in this election and obviously confidence imploded,” said Ben Schwartz, a market strategist at Lightspeed Financial.

Investors dumped Italian government bonds, sending their yields higher, and erased most of an early rally in Italy’s stock market. The yield on Italy’s 10-year government bond shot up to 4.43 percent from 4.12 percent early in the day, a sign that investors’ confidence in Italy’s government was dimming quickly. The country’s benchmark stock index, the FSTE MIB, rose 0.7 percent, giving up an early gain of 4 percent.

Investors worry about the outcome of Italy’s election because it could set off another crisis of confidence in the region’s shared currency, the euro. Financial markets in both Europe and the U.S. have swooned at the prospect of Italy or Spain being dragged into the region’s government debt troubles, which have led to bailouts of Greece, Ireland and Portugal and severe disruptions in financial markets.

As stocks plunged, gauges of market sentiment indicated that investors were becoming more risk-averse and parking their money in defensive assets. The yield on the 10-year Treasury note fell sharply as investors plowed money into U.S. government bonds.

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