Stocks dropped more than 1 percent at the open on Monday as worries escalated about the euro-zone debt crisis after Standard & Poor's cut Italy's rating outlook and Spain's ruling Socialists suffered an elections setback.

S&P cut its rating outlook for Italy to negative from stable, citing weak growth prospects and increased risks from a mountain of debt.

The cut came on the heels of a downgrade of Greece's credit rating by Fitch Ratings on Friday.

Greek Prime Minister George Papandreou discussed new emergency measures with his cabinet Monday to cut the deficit, keen to convince lenders the government can deal with a debt crisis without restructuring.

Adding to the worries, Spain's Socialists, reeling from losses in local elections, faced a balancing act between voter anger over sky-high unemployment and investor demands for strict austerity measures.

The trend is lower for very good reason -- concern over demand, concern over credit status globally, said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

There is no shortage of challenges for the market and good reason for pause. We've had a great two-year run, and it would be absolutely indefensible for institutions to not be locking in some gains.

The Dow Jones industrial average <.DJI> dropped 145.88 points, or 1.17 percent, to 12,366.16. The Standard & Poor's 500 Index <.SPX> lost 15.76 points, or 1.18 percent, to 1,317.51. The Nasdaq Composite Index <.IXIC> fell 45.70 points, or 1.63 percent, to 2,757.62.

The CBOE volatility index <.VIX> surged 10 percent, topping 20 on an intraday basis for the first time since March 23.

The political and economic climate in Europe sent the euro to a two-month low versus the dollar <.DXY>, which dented commodity prices in turn. U.S. crude oil futures lost 2.6 percent.

Alcoa Inc declined 1.3 percent to $16.06 and mining company Freeport-McMoRan Copper & Gold Inc fell 1.5 percent to $47.66. Chevron Corp dipped 1.3 percent to $101.26, while the PHLX oil service sector index <.OSX> shed 2.4 percent.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry and Jeffrey Benkoe)