Wall Street loses ground on fading euro zone optimism

By Chuck Mikolajczak

Doubts resurfaced over Europe's plan to stem its debt crisis and Italian and Spanish bond yields soared, prompting the European Central Bank to buy the debt.

MF Global Holdings Ltd <MF.N>, the futures broker that made big bets on European sovereign debt, filed for Chapter 11 bankruptcy protection after talks to sell assets to Interactive Brokers Group Inc <IBKR.O> broke down. Shares of the troubled brokerage were halted.

Despite the declines, the benchmark S&P 500 index was up 12 percent for the month and remained on track for its largest monthly percentage gain since January 1987.

"(The dollar rise) is part of it, but a lot of it is also rethinking Europe. There was a lot of ebullience after the meeting and that is starting to fade a bit," said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.

"It's difficult cobbling together the amount of money that people think is going to be required here. There is a lot of concern (if) the political will is there. It's going to be hard to get some of these austerity measures in place."

The Dow Jones industrial average <.DJI> fell 146.49 points, or 1.20 percent, at 12,084.62. The Standard & Poor's 500 Index <.SPX><.INX> slipped 17.21 points, or 1.34 percent, at 1,267.88. The Nasdaq Composite Index <.IXIC> dropped 27.98 points, or 1.02 percent, at 2,709.17.

Despite the declines, the benchmark S&P 500 index was up 12 percent for the month and remained on track for its largest monthly percentage gain since January 1987.

Banks stocks were among the worst performing, with the KBW bank index <.BKX> down 2 percent, although analysts felt the declines were unrelated to any fears of systemic failure in light of MF Global's bankruptcy.

The U.S. dollar shot up to a three-month high against the yen as the government of Japan intervened to curb its currency's appreciation, which is hurting the export-based economy.

The higher greenback pressured commodity prices, with copper off 2.3 percent and Brent crude was off 1 percent. Many commodities are priced in the greenback, making a spike in dollar prices more expensive for traders in other currencies and saps demand.

The S&P materials sector <.GSPM> dropped 2.7 percent. Shares of Freeport-McMoRan Copper & Gold Inc <FCX.N> lost 3.8 percent to $41.19. Alcoa Inc <AA.N> dropped 4.7 percent to $11.03.

Volume was light, with about 2.9 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq. Declining stocks outnumbered advancing ones on the NYSE by about three-to-one, while on the Nasdaq, decliners beat advancers more than three-to-one.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)