By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- U.S. stocks fell sharply on Monday, with the Dow Jones Industrial Average having its worst session this year, as Italian elections and looming spending cuts in the U.S. hit sentiment.
The euro (EURUSD) tumbled against other global currencies, particularly the Japanese yen (EURJPY), as investors tracked the outcome of national elections in Italy, where a potentially strong performance by Silvio Berlusconi's coalition is seen as a threat to the nation's austerity agenda.
Uncertainty about Europe and the March 1 deadline for U.S. lawmakers to reach a deal to avert automatic spending cuts, known as sequestration, had the CBOE Volatility Index (VIX) climbing 35%.
"The market started off strong today, but is starting to get a little worried. If the sequestration happens, and the big cuts are in place, I am pretty sure the market is going to pull back, maybe 3% to 5%, then go to all-time highs," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab.
After an 81-point rise, the Dow Jones Industrial Average (DJI) fell 216.40 points, or 1.6%, to 13,784.17, with all but three of its 30 components finishing in the red.
The S&P 500 index (SPX) fell 27.75 points, or 1.8%, to 1,487.85, with financial companies the worst performing of its 10 sectors, all of which closed lower.
The Nasdaq Composite index (RIXF) shed 45.57 points, or 1.4%, to 3,116.25.
Equities have fallen in recent sessions, with the S&P 500 on Friday tallying its first weekly drop this year, as strategists said the market could use a correction or at minimum a pause given an advance that has the S&P 500 up 5.9% so far this year.
"The market is already primed for a pullback, all it needs is a catalyst," said Frederick.
For every stock that advanced more than three fell on the New York Stock Exchange, where almost 819 million shares traded. Composite volume approached 4 billion.
On the New York Mercantile Exchange, the price of oil slipped a bit, with crude for April delivery (CLJ3) down 2 cents to close at $93.11 a barrel.
After polls closed in Italy's second day of general-election voting, partial results pointed to an outcome that could end in a split parliament.
Italy's state broadcaster pointed Monday to a stronger-than-initially-thought showing by Berlusconi and his allies in the upper house. A center-left coalition headed by Democratic Party leader Pier Luigi Bersani is reportedly on track for a majority in the lower house.
Exit polls showing the lead of Bersani's center-left alliance "perhaps being challenged" led to a pullback on Wall Street, said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
A divided Congress in Italy could "run counter to reforms Italy has undertaken to be a member of good standing in the European Union, and could compromise Italy's debt and its position in the euro," he added.
Friday's deadline to avoid across-the-board reductions in federal spending brings another standoff between President Barack Obama and Republicans in Congress. If lawmakers fail to move, government spending will be cut by $85 billion in the last seven months of this fiscal year.
Lowe's Cos Inc.'s (LOW) on Monday reported quarterly results that exceeded estimates, with the home-improvement chain projecting higher revenue for the current fiscal year. Shares fell nearly 5%.
Barnes & Noble Inc. (BKS) shares rallied 11% after the founder and chairman disclosed in a regulatory filing Monday that he had told the book seller he would attempt to acquire the company's retail business.
Affymax Inc. (AFFY) shares dropped 85% after the drug maker and Takeda Pharmaceutical Co. voluntarily recalled a dialysis treatment in the wake of reports it could prompt potentially life-threatening reactions.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires