US stocks dive after ECB doesn't act

US stocks on the Dow Jones industrial average dropped nearly 200 points Thursday after the head of the European Central Bank said there was no plan for large-scale purchases of European government bonds, as many in the markets had hoped.

ECB President Mario Draghi's remarks sent borrowing costs soaring for Italy, Spain and other countries with heavy debt burdens. European stock indexes fell and the euro weakened against the dollar. Draghi made his comments after the central bank cut its benchmark interest rate to 1 percent and took other modest steps to help shore up Europe's financial system.

Bank stocks led the way lower. Citigroup Inc. plunged 7 percent; Morgan Stanley 8.4 percent. JPMorgan Chase & Co. slid 5.2 percent, the most of the 30 large companies in the Dow average.

"People are very nervous that Europe will yet again fail to adequately address the sovereign debt crisis," says David Kelly, chief market strategist for JP Morgan Funds. He says investors overlooked good news on the U.S. economy Thursday: Claims for unemployment benefits dropped, and wholesale companies increased their inventories in expectation of stronger sales.

The Dow Jones industrial average dropped 198.67 points, or 1.6 percent, to close at 11,997.70. The drop was the worst since Nov. 23 and ended a three-day run of modest gains. The last time the Dow closed below 12,000 was Nov. 29.

The Standard & Poor's 500 index fell 26.66, or 2.1 percent, to 1,234.35. The Nasdaq lost 52.83, or 2 percent, to 2,596.38.

The dollar and U.S. Treasury prices rose as traders shifted money into assets seen as relatively safe. The yield on the benchmark 10-year Treasury note dipped to 1.97 percent from 2.03 percent late Tuesday.

In France, French President Nicolas Sarkozy and German Chancellor Angela Merkel tried to muster support from other European leaders for their latest bid to save the euro currency from collapsing under the weight of huge government debts.

A summit that began late Thursday has been billed as a make-or-break moment to convince markets that Europe will take bold enough action to prevent the euro from breaking up. Reports that Germany had rejected some proposals for stemming the crisis sent the Dow lower in the last half-hour of trading.

The yield on benchmark 10-year Italian government bonds jumped half a percentage point, a huge move, to 6.47 percent as investors sold European government debt following Draghi's remarks. The yield on Spain's 10-year bonds rose one-third of a percentage point to 5.71 percent. European markets fell. Italy's main index slumped 4.3 percent; Germany's DAX index 2 percent.

Traders sent yields on Italian government bonds above 7 percent last month, a level at which weaker countries like Greece and Portugal were forced to seek relief from their lenders. When borrowing costs jump too high, it threatens a government's ability to pay off existing debts and could ultimately lead a government to default.

Markets had interpreted recent remarks by Draghi to mean that the ECB would step in to buy government bonds if nobody else would. His comments Thursday dampened those expectations. Large-scale purchases of European government bonds by the ECB would send borrowing rates for indebted European countries sharply lower and ease strains on Europe's financial system.

Optimism that European leaders would resolve the region's debt crisis has helped drive the Dow up 12.6 percent from its low of the year on Oct. 3.

Europe's crisis could still get worse and may force the U.S. and other countries to step in, said Ihab Salib, a global bond fund manager at Federated Investors. But the euro is unlikely to collapse because too much is at stake.

"Everybody has significantly more to lose if they break apart than if they stay together," Salib said. "I don't think the world is going to let the euro fall apart. They'll do whatever it takes."

Among companies making big moves:

— McDonald's Corp. rose half of 1 percent, the only stock in the Dow that was higher. The world's largest fast-food chain said revenue at stores open at least 13 months jumped on stronger sales around the world.

— Costco Wholesale Co. fell 2 percent after reporting earnings that fell short of analysts' expectations. The retailer said higher costs ate up much of a 12.5 percent increase in sales.

— DemandTec Inc. jumped 56 percent on news that International Business Machines Corp. plans to buy the software company for $440 million in cash. DemandTec's software helps businesses set prices for products they sell.

— High-end electric car company Tesla Motors Inc. plunged 9.7 percent after the company was downgraded by an analyst.

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AP Economics Writer Paul Wiseman contributed to this report from Washington.