Stocks fell more than two percent in early trading on Tuesday on fears the euro zone's sovereign debt crisis was worsening and the U.S. economy was sliding back into a recession.

European shares dropped 1 percent, extending the previous session's sharp decline, with bank shares hitting a 29-month low on worries about the political handling of the euro zone debt crisis.

The region's stocks tumbled 4 percent on Monday, with financial issues falling to their lowest in more than two years. U.S. markets were closed for the Labor Day holiday on Monday.

Swiss shares bucked the trend, boosted after Switzerland's central bank intervened to drive down the value of the franc, buoying exporter shares such as Transocean Ltd.

The PHLX Europe sector index slumped 4.8 percent. U.S.-listed shares of Credit Suisse slumped 13.6 percent to $23.66.

Europe's problems are our problems. We have concerns about the slowdown in the emerging markets, specific to Asia. We have a euro zone that is an apoplectic frenzy of just trying to right the ship, said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

If you can find some stabilizing influence in the euro zone to give the global markets some confidence, I'd be shocked.

The Dow Jones industrial average dropped 280.37 points, or 2.49 percent, to 10,959.89. The Standard & Poor's 500 Index lost 30.45 points, or 2.59 percent, to 1,143.52. The Nasdaq Composite Index fell 54.41 points, or 2.19 percent, to 2,425.92.

Investors awaited the Institute for Supply Management's August non-manufacturing index at 10:00 a.m. EDT for insight into the pace of economic recovery. Wall Street expectations are for a reading of 51 versus the 52.7 in the prior month. Data on Friday showed zero net U.S. employment growth and stoked recession concerns.

Big U.S. banks, in talks with state officials on settling claims of improper mortgage practices, have been offered a deal that could limit legal liability in return for a multibillion-dollar payment, the Financial Times reported.

Bank of America Corp lost 5.8 percent to $6.83 and JPMorgan Chase & Co fell 4.1 percent to $33.20.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)