Stocks fell about 2 percent on Wednesday as a spike in Italian bond yields heightened fears the debt crisis in Europe was spreading.

The selloff hit all 10 S&P sectors, with financials down nearly 3 percent as investors dumped bank stocks on concerns about their exposure to European debt. The KBW Bank index fell 3.1 percent.

Italian bond yields shot up to 7.502 percent, a new high since the euro was introduced in 1999, as investors unloaded the debt after a clearing house increased margin calls. Prime Minister Silvio Berlusconi's promise to resign failed to persuade markets the country would deliver on economic reforms.

We just added another layer of uncertainty. The issue with Italy brings the region closer to a broader negative scenario and raises more concerns about a financial crisis, said Bob Pavlik, the chief market strategist at Banyan Partners in New York.

Portugal and Ireland were forced to seek bailouts when their borrowing costs reached similar levels.

The Dow Jones industrial average tumbled 217.74 points, or 1.79 percent, at 11,952.44. The Standard & Poor's 500 Index slid 25.48 points, or 2.00 percent, at 1,250.44. The Nasdaq Composite Index took off 57.56 points, or 2.11 percent, at 2,669.93.

Reflecting growing market anxiety, the CBOE Volatility Index VIX jumped 13.5 percent. The index usually moves inversely to the S&P 500 as traders use it as a hedge against a further market fall.

Italy has replaced Greece at the center of the euro zone debt crisis and is seen teetering on the cusp of requiring a bailout.

Italian bonds are essentially serving as another fear index like the VIX, and right now they're reflecting a lot of fear, said Charles Reinhard, deputy chief investment officer at Morgan Stanley Smith Barney in New York.

Among bank stocks, Morgan Stanley fell 5.9 percent to $16.30 and Goldman Sachs Group Inc dropped 5 percent to $103.16. Bank of America Corp lost 3.2 percent to $6.32.

General Motors Co slid 7.4 percent to $23.19 after the automaker said it would not break even for the year in Europe, as it had forecast, due to deteriorating conditions in the region.

(Reporting by Angela Moon; additional reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)

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