The Greek government shocked financial markets with news that it would put its unpopular cost-cutting plan to a public vote. If it's defeated, the country could drop the European currency and default on its debt, which would put the European banking system and regional economies at risk of another crisis.
"The Greek referendum puts the connections between European countries at risk, from free-trade agreements to the common currency," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
The Dow Jones industrial average dropped 194 points, or 1.6 percent, to 11,760 as of 11 a.m. The S&P 500 fell 23, or 1.8 percent, to 1,230. The Nasdaq composite fell 49, or 1.8 percent, to 2,635.
Banks fell hard as investors worried about how exposed U.S. banks are to European debt. Citigroup lost 4.5 percent. Morgan Stanley dropped 6.5 percent. JPMorgan Chase & Co. fell 4.2 percent, the largest drop among the 30 stocks in the Dow.
European markets fell ever more. Germany's DAX index fell 4.7 percent and France's CAC-40 fell 4.8 percent.
French banks have large holdings of Greek government bonds and would be exposed to severe losses if Greece goes through a disorderly default on its debt. Societe Generale SA plunged 16 percent in Paris trading and BNP Paribas SA lost 11 percent.
On Monday the U.S. securities firm MF Global Holdings Ltd. became the first big casualty of the European debt crisis on Wall Street. The company, led by former New Jersey Governor Jon Corzine, filed for bankruptcy after concerns about the company's holdings of European government bonds caused its business partners to pull back from the firm and ratings agencies to downgrade its debt.
The yield on the 10-year Treasury note sank to 2.01 percent from 2.16 percent late Monday, a steep drop. Yields fall when bond prices rise. The dollar rose to $1.36 for every euro.
The prime minister of Greece called for the referendum late Monday and the news sent U.S. stocks spiraling lower. The S&P 500 index fell 2.5 percent, which put the broad-market index below where it started the year.
Credit Suisse Group AG fell 9 percent after Switzerland's second-largest bank reported profits that fell short of expectations. The bank also announced plans to cut 1,500 people from its payroll.
The drop came a day after U.S. stocks closed out their best month in nearly 10 years. The Standard & Poor's 500, the most widely used market index, rose 10.8 percent in October, the biggest gain since December 1991.
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