The US stocks have witnessed worrying signs from U.S. earnings. McDonald's Corp fell 2.3 per cent to $89.45 after posting lower-than-expected profit. Its chief executive officer said the results "reflected the slowing global economy (and) persistent economic headwinds."

The Spanish region of Murcia looked set to follow Valencia in tapping a government program to keep its finances afloat, while local media reported half a dozen regions were ready to do likewise.

German magazine Der Spiegel cited high-ranking representatives in Brussels saying the IMF may not take part in any additional financing for Greece. Inspectors from the European Commission, European Central Bank and International Monetary Fund arrive in Athens on Tuesday.

Overseas stock and commodity markets fell steeply. European shares .FTEU3 lost 2.6 per cent, led by euro zone banking stocks, a trend the United States followed as shares of Morgan Stanley (MS.N) fell 2.3 per cent to $12.50.

"It was a wipeout in the overseas markets," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago. "We are going to echo that as confidence gets sucked out."

"The problem is bigger and more intractable than what happened in (the financial crisis) in '08," he said. "You could lose 40 points on the S&P today."

The Dow Jones industrial average .DJI dropped 211.42 points, or 1.65 per cent, to 12,611.15. The Standard & Poor's 500 Index .SPX fell 20.92 points, or 1.54 per cent, to 1,341.74. The Nasdaq Composite Index .IXIC lost 63.47 points, or 2.17 per cent, to 2,861.83.

Traders were also focused on a slowdown in the global economy. China's economic outlook was cut by Japan, its biggest Asian trading partner, Bloomberg reported.

The euro slid to a two-year low against the dollar and a near 12-year trough against the yen, pressured by fears that Spain may eventually need a full sovereign bailout.

Attention has again turned to the potential for Greece to exit the euro zone. Alexander Dobrindt, a leading German conservative was quoted on Monday saying Greece should start paying half of its pensions and state salaries in drachmas as part of a gradual exit from the euro zone.

"We have the Spanish problem very high on the surface here, their 10-year rates are now trading at 7.39 per cent and you've got Greece rates starting to rise again," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

The yield on the Spanish 10-year bond was last at 7.5 per cent, well over what analysts consider a sustainable level.

"Greece is beginning to come back into the headlines on top of Spain and that's what is causing the volatility; there are people out there who think we may be approaching the end game."

Spain's IBEX stock index .IBEX fell 2.4 per cent, hitting its lowest level in nearly a decade. Italy's FTSE MIB .FTMIB fell nearly 4 per cent and hit its lowest level in more than 3 years.