Dow and S&P 500 suffer worst day of 2013

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NEW YORK (CNNMoney) — The Dow and S&P 500 suffered their biggest one-day decline of the year Monday as U.S. stocks were whipsawed by concerns about political instability in Italy.

After opening higher on a global updraft, the Dow Jones industrial average ended the day down 216 points, or 1.5%. The S&P 500 fell 1.8% and the Nasdaq lost 1.4%. It was the worst day since Nov. 7 for the Dow and S&P 500, and comes after both indexes logged their worst week of the year last week.

And Wall Street’s so-called fear gauge, the CBOE market volatility index, or VIX, surged 32%.

Initial results from Sunday’s election showed the center-left party of Pier Luigi Bersani leading in both chambers of parliament. But later projections indicated that former Prime Minister SIlvio Berlusconi and his anti-austerity allies were not far behind in the Senate race, which is decided on a regional basis.

While the final outcome is still uncertain, investors are concerned that “gridlock” in the Italian Senate could undermine the progress Italy has made in overhauling its troubled economy, said Dave Rovelli, managing director of U.S. equity trading at brokerage Canaccord Adams.

Renewed political dysfunction in Italy could put the nation’s €1 trillion bond market at risk and reignite worries about the future of the euro area.

“They’re worried that if Berlusconi gets elected, there will be no one ruling the roost,” said Rovelli. “The market is back to where it was a year ago, we’re focusing on Italian and Spanish bond yields.”

European markets pared earlier gains. The DAX in Germany and France’s CAC40 both rose, but the FTSE 100 in London lagged. Moody’s announced late Friday that it had lowered the United Kingdom’s AAA credit rating, citing the country’s rising debt burden and tepid growth outlook. The British pound fell versus the dollar and the euro in trading Monday.

Meanwhile, investors remain sanguine about the latest budget impasse in Washington.

Chances are slim that Congress will avert the automatic spending cuts, known as sequestration, before they take effect this Friday. It’s more likely lawmakers will reach a deal to replace the cuts after they begin. But there’s no telling when.

Investors are also bracing for Federal Reserve chairman Ben Bernanke’s annual testimony on the U.S. economy to Congress this Tuesday and Wednesday.

The worries about Italy also overshadowed reports that Prime Minister Shinzo Abe is poised to nominate an advocate of aggressive monetary easing to head the Bank of Japan. The yen fell to its lowest point versus the dollar since May 2010, while Japan’s benchmark Nikkei index added 2.4%.

Chinese shares rose modestly after a report on Chinese manufacturing fell unexpectedly. The Hang Seng increased 0.2% and the Shanghai Composite closed up 0.5%.

In corporate news, shares of Barnes & Noble shot higher after Chairman Leonard Riggio said he plans to buy the company’s retail operations, leaving the Nook electronic book segment a separate company. No price was disclosed in his filing with the Securities and Exchange Commission.

Lowe’s reported lower sales and earnings, but both results were slightly better than forecasts and the company announced a $5 billion share repurchase.

Results are due later in the week from companies including Home Depot, Macy’s, J.C. Penney and Groupon.

Shares of 3D systems fell after the maker of 3D printers reported quarterly results that were slightly better than expected but missed revenue forecasts. A previously announced three-for-two stock split also went into effect Monday.

Shares of Chesapeake Energy fell after the embattled natural gas producer sold some oil and gas assets to Sinopec for $1 billion.

FarmVille maker Zynga shares surged on reports New Jersey will revise online gambling laws.

Oil and gold prices rose, while the U.S. dollar fell versus the euro.

The yield on the 10-year Treasury note edged up to 1.99%, from 1.97% previously.