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Renewed worries that European leaders won't be able to quell the debt crisis before it boils over sent stocks falling sharply.

Today's Markets

As of 3:10 p.m. ET, the Dow Jones Industrial Average fell 169 points, or 1.4%, to 12,030, the S&P 500 slumped 23.3 points, or 1.8%, to 1,238 and the Nasdaq Composite slid 42.7 points, or 1.6%, to 2,607.

Hopes that the ECB might enact a massive bond-buying program to ease yields on sovereign debt were dashed to some extent on Thursday. ECB head Mario Draghi said government bond purchases are limited to enacting monetary policy and that the European Union treaty technically restricts broader purchasing. He also said making such purchases by lending to the International Monetary Fund, a concept that has been widely discussed among analysts, would be legally challenging. However, Draghi came short of explicitly making a ruling either way.  

There was a also a report from the European Banking Authority that banks in the eurozone are short some $115 billion in capital. Banks will have until mid-January next year to raise the requisite capital.

Financial shares, particularly investment banks like Morgan Stanley (MS), were slammed the hardest on the back of the EU jitters. European banks such as UBS (UBS), RBS (RBS) and Societe Generale (NYSE:SCGLY5) were pummeled even more than American banks. Looking more broadly, the Dow Jones U.S. Financials index fell 3.2%, while the Dow Jones Global Banking index was off 2.4%.  

Basic material and energy shares were also down sharply as a result of strong selling in precious-metal and energy futures. 

In a sign of the depth of the selling, volume in declining shares on the New York Stock Exchange outpaced advancing shares by a ratio of roughly 17 to one. Meanwhile, volatility jumped 6.3%, as measured by the CBOE's VIX.

European blue chips tumbled 2.4% while the euro slid 0.66% to $1.3321.

In light of the growing economic headwinds created by the debt crisis, the ECB also said that it plans on taking on non-standard measures to buoy the economy. That move was initially seen as a positive, but then was quickly overshadowed by Draghi's comments.

The central bank also sliced its main refinancing rate by a quarter percentage point to 1%. The rate move was largely anticipated, but markets were less sure if the ECB would take other actions. 

European Union leaders are set to begin descending on Brussels on Thursday for a summit that is being billed by many analysts as crucial in staving off a collapse of the euro, a once unthinkable scenario.  

The backdrop for the meeting is gloomy: Italian debt yields are less than half a percentage point away from the painful 7% level and in a sign of how real the worries are, the Wall Street Journal reported last night that several European central banks are making contingency plans in case they have to revert to their pre-euro currency. French President Nicholas Sarkozy also said on Thursday that time is running out against the single currency, and that there will be no second chances if a deal isn't reached, according to a report by Reuters.

Traders are hoping for decisive action from European leaders to solve the debt debacle that is now in its second year, and has spread from periphery economies into the core of the European Union.  One concept that has been discussed, according to media reports, is forcing closer fiscal ties between eurozone states in a bid to convince the ECB to launch a bond-buying program. 

On the U.S. front, the weekly jobless claims report from the Labor Department topped expectations on Thursday morning.  New claims for unemployment benefits fell last week to 381,000 from an upwardly revised 404,000 the week prior.  Economists had expected a smaller drop to 395,000 from an initial reading of 402,000.

Energy markets were to the downside.  The benchmark crude oil contract traded in New York fell $2.15, or 2.1%, to $98.34 a barrel.  Wholesale RBOB gasoline fell 0.78% to $2.57 a gallon. 

In metals, gold dropped $31.40, or 1.8%, to $1,713 a troy ounce. Silver was off 57 cents, or 1.7%, to $31.99 a troy ounce. U.S. government bond prices fell, pushing yields higher.  The benchmark 10-year Treasury note yields 1.981% from 2.040%. 

Foreign Markets 

European blue chips tumbled 2.4%, the English FTSE 100 slid 1.1% to 5,484 and the German DAX sold off 2% to 5,874. 

In Asia, the Japanese Nikkei 225 dropped 0.66% to 8,665 and the Chinese Hang Seng slipped 0.69% to 19,108. 

Follow Adam Samson on Twitter @adamsamson.