Stocks plunge on Italy's political uncertainty

U.S. stocks posted sharp losses Tuesday, as the Dow tumbled nearly 400 points on political uncertainty in Europe.

The Dow Jones Industrial Average dropped 391.64 points, or 1.58%, to 24,361.45. The S&P 500 fell 31.47 points, or 1.16%, to 2,689.86. The Nasdaq Composite was down 37.26 points, or 0.5%, at 7,396.59.

Sparking the selloff was the political crisis in Italy. Italian President Sergio Mattarella decided Sunday to block the formation of a euroskeptic government, bringing the country closer to a repeat election and reviving longstanding worries about the stability of the eurozone.

The CBOE Volatility Index, known as Wall Street's fear gauge, surged 28.7% to its highest level since April 25.

“The economic recovery in the United States and around much of the world appears to be intact, and the Italian situation seems to be more of a temporary political problem and not something larger,” said Chris Zaccarelli, chief investment officer of Independent Advisor Alliance. “However, crises and contagion often start in a small way and then move in unpredictable ways, so some caution is warranted.”

Ticker Security Last Change Change %
I:DJI DOW JONES AVERAGES 39150.33 +15.57 +0.04%
SP500 S&P 500 5464.62 -8.55 -0.16%
I:COMP NASDAQ COMPOSITE INDEX 17689.360656 -32.23 -0.18%

Financial shares led the decline, with insurers, diversified financials and banks under pressure. The S&P financial sector was down about 3.4% on the day, and financials accounted for one-third of the Dow's selloff.

Falling Treasury yields were also a headwind for bank stocks. The yield on the benchmark 10-year note fell to its lowest mark since April 12 as it dropped below 2.8%.

Disney shares fell more than 2% on a day when the media giant's ABC division canceled its 'Roseanne' sitcom after controversial tweets from Roseanne Barr.

Oil futures were sharply lower on Tuesday as traders digested the potential for Saudi Arabia and Russia to boost oil output. U.S. crude lost $1.15, or 1.7%, to $66.73 a barrel.

Economic data reports included the S&P Case-Shiller report on home prices. Home prices increased in March, but the gains were in line with the prior month’s advance.

The Conference Board's consumer confidence index rose to 128 in May from a revised 125.6 in April. A measure of current conditions, the present situation index, hit a 17-year high of 161.7, up from 157.5 in the prior month.

Fox Business' Ken Martin contributed to this article