U.S. stocks tumbled on Tuesday as downgrades of Greece and Portugal fueled fear about euro-zone economic stability, and a grilling of Goldman Sachs on Capitol Hill heightened the possibility of financial reform.

Stocks posted their worst day in nearly three months and the CBOE Vix volatility index <.VIX>, Wall Street's barometer of investor fear, jumped about 31 percent, its biggest one-day move since October 2008.

The move came as Senators hammered Goldman Sachs Group Inc executives for taking advantage of the housing bubble and making billions off that market's collapse. The hearings coincided with lawmakers' efforts to pass strict regulations for banks.

As the drama unfolded in Washington, the cost of insuring Greek and Portuguese debt against default rose to record highs after rating agency Standard and Poor's slashed the sovereign ratings of both countries.

The markets are really selling off on the combination of the widening sovereign debt crisis and the hammering that is going on in the Senate hearing, said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio. Just like in 2008, when you had one big company fall after another, you're now seeing this spread from Greece to Portugal.

The Dow Jones industrial average <.DJI> dropped 213.04 points, or 1.90 percent, to 10,991.99. The Standard & Poor's 500 Index <.SPX> slid 28.34 points, or 2.34 percent, to 1,183.71. The Nasdaq Composite Index <.IXIC> lost 51.48 points, or 2.04 percent, to 2,471.47.

The combined volume on the New York Stock Exchange, the American Stock Exchange and Nasdaq was the second highest this year, with 12.77 billion shares traded.

Goldman's stock rose 0.7 percent to $153.04, but the S&P financial index <.GSPF> tumbled 3.4 percent. Although Goldman's stock bucked the market's sharp downtrend on Tuesday, it's still down nearly 17 percent from its recent closing high on April 15, which was the night before the U.S. Securities and Exchange Commission filed civil fraud charges against the company.

The fear that there may be financial reform that might be a little overburdening on the market, that's hurting the financial stocks and spilling over into the market in general, said Jim Maguire Jr., an NYSE floor trader at E.H. Smith Jacobs.

The stock sell-off was broad, with economically sensitive sectors such as materials, energy, financials and consumer discretionary each falling around 3 percent. Chevron Corp was among the biggest drags on the Dow Industrials, falling 2.9 percent to $80.23.

The S&P 500 broke through a technical resistance level and chartists now look at 1,180 as a near-term support. Mid-term support is seen at around 1,150, the peak the benchmark hit in January.

Major U.S. stock indexes posted their worst losses since Feb 4, when the S&P 500 fell more than 3 percent and the Dow briefly fell below 10,000, also on concerns about the fiscal stability of Portugal, Spain and Greece.

U.S.-traded shares of the National Bank of Greece sank almost 16 percent to $2.60, just above a session low of $2.56, their lowest since March 2009.

The euro fell more than 2 percent against the yen and was trading at a one-year low against the U.S. dollar.

Reflecting Wall Street fears over the sovereign debt problems, the CBOE Volatility Index <.VIX> surged almost 33 percent to an intraday peak at 23.20, its highest since February. At the close, the VIX was up 30.57 percent at 22.81.

3M Co was one of only two Dow components in the positive zone, up 0.6 percent at $87.97, after posting better-than-expected quarterly profits and raising its full-year outlook.

(Reporting by Edward Krudy; Editing by Jan Paschal)

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