By Jonathan Cheng U.S. stocks suffered their biggest one-day decline since mid-September as a surge in Italian bond yields and fresh concerns about the euro zone pummeled bank stocks. The Dow Jones Industrial Average dropped 389.24 points, or 3.20%, to 11780.94, the biggest one-day slide since Sept. 22. The Standard & Poor's 500-stock index fell 46.82 points, or 3.67%, to 1229.10, while the Nasdaq Composite declined 105.84 points, or 3.88%, to 2621.65. The losses wiped out the previous two days' gains and pushed the major indexes into negative territory for the month. It also sent the S&P 500 and the Nasdaq back into the red for 2011. The Dow is now up 1.8% this year. Leading the declines were financial and materials stocks. J.P. Morgan Chase fell 7.1% and Bank of America declined 5.7%. Hewlett-Packard and Alcoa were also weak, shedding 5.4% each. Morgan Stanley, which fell in September due to fears about its exposure to French banks, tumbled 9%. The investment bank said it has $1.79 billion in net "country risk exposure" to Italy, a category that includes obligations from corporations and banks in addition to sovereign debt. Italian bond yields soared to euro-era highs after clearinghouse LCH.Clearnet Group raised the margin required to trade Italy's government bonds. The yield on the benchmark 10-year bond rose above the closely watched 7% level, peaking at 7.494% before coming back to 7.205%, according to Tradeweb. In addition, a report in Germany suggesting that German Chancellor Angela Merkel's party is trying to allow countries to leave the euro while remaining in the European Union added further to uncertainties. "Italy started us off, but everything subsequent to that is whether the euro zone is going to hold together," said Rick Bensignor, chief market strategist at Merlin Securities. "You can change politicians, like we're seeing with Papandreou and Berlusconi, but if you have someone actually leave the euro, that's a different thing." The barrage of headlines had many investors scurrying for Treasurys, which sent the yield on the benchmark 10-year note back below 2%, to 1.954%--a one-month low. The "defensive" sectors that are less sensitive to economic conditions fared better, with telecommunications, utilities, consumer staples and health-care stocks limiting the damage. All but one of the S&P 500 stocks finished in negative territory, with Best Buy the sole company to buck the trend, with a 1.4% gain. "Everyone knows Italy has one of the biggest bond markets in the world, and this doesn't just stop at Italy," said Owen Fitzpatrick, portfolio manager and head of U.S. large-cap growth equity for DWS Investments, a unit of Deutsche Bank. "Greece had to be ringfenced so this didn't spill over into Italy, and given what we saw in Greece last two weeks, it did spill over and now we're dealing with the fallout ... They can't get around this and ringfence this." European stocks finished lower. The Stoxx Europe 600 lost 1.7%, Germany's DAX index fell 2.2% and Italy's FTSE MIB index dropped 3.8%. The euro tumbled 1.9% to $1.3556, its lowest value in a month. Gold futures slipped 0.4% to $1790.90 per troy ounce, while oil prices fell 1.1% to settle at $95.74 a barrel. In corporate news, General Motors lost 11% after the automobile maker provided a downbeat outlook, citing deteriorating economic conditions. Adobe Systems sank 7.7% after the company said it would cut 750 jobs as part of a restructuring plan and provided a lower-than-expected revenue outlook. Ralph Lauren fell 5.7% after the high-end apparel maker missed earnings expectations while raising its outlook for the full year. Retailer Macy's fell 5.3% as third-quarter earnings jumped, but its profit margins narrowed more than Wall Street expected. Take-Two Interactive Software edged down 1.3% after the games maker reported better-than-expected fiscal second-quarter results but provided a somewhat downbeat earnings outlook. Universal Display gained 0.7% after reporting better-than-expected third-quarter results, while STEC dropped 12% after the company's disappointing fourth-quarter outlook. Cisco Systems fell 3.8%. After the closing bell, the networking company topped earnings and revenue estimates, pushing shares up 2% in after-hours trading.