Stocks slumped more than 1 percent on Monday as worries about the U.S. budget talks and the euro-zone debt crisis sent a shudder through markets and overshadowed the start of earnings season.

Renewed concerns that Europe's debt crisis would spread, an increase in Chinese inflation and an impasse in budget talks in Washington converged to jolt investors after Friday's shockingly weak jobs report. The S&P 500 lost its gains for the month, though the Dow and Nasdaq remained modestly in the plus column.

Dashing hopes for a grand bargain to tame U.S. debt, a highly anticipated Sunday meeting broke little new ground as President Barack Obama and congressional Republicans kept sparring over taxes. In a press conference, Obama called for the largest possible deficit-reduction deal.

While investors still consider it unlikely there will be no deal on the debt, the lack of resolution at a time of growing international concerns weighed on sentiment. The CBOE Volatility Index <.VIX> or VIX, Wall Street's barometer of investor anxiety, spiked 14.7 percent, though volume remained at lighter-than-average levels.

The dual situations of U.S. debt and Europe are very severe and causing so much uncertainty on a global macroeconomic basis, said Joseph Cangemi, managing director at BNY ConvergEx Group in New York.

That's what is driving trading on a day-to-day basis right now, though the volume suggests this may not be a long-term trend.

The Dow Jones industrial average <.DJI> was down 140.50 points, or 1.11 percent, at 12,516.70. The Standard & Poor's 500 Index <.SPX> was down 21.10 points, or 1.57 percent, at 1,322.70. The Nasdaq Composite Index <.IXIC> was down 50.31 points, or 1.76 percent, at 2,809.50.

Financials and other economically sensitive stocks fell. Bank of America Corp lost 2.8 percent to $10.40 while Freeport McMoRan Copper & Gold Inc slid 1.9 percent to $54.06. An S&P financial index <.GSPF> dropped 2.1 percent and ranked as the biggest loser among the S&P 500's sectors.

Global equity markets fell and the cost of insuring Italian debt jumped to a record amid fears of contagion in Europe's debt markets and reports some European Union leaders were considering allowing a selective default by Greece.

U.S. exchange-traded funds tracking European equity markets came under heavy selling pressure. The IShares MSCI Italy Index Fund , a fund that tracks Italian stocks, fell 5.9 percent while the MSCI Europe Financials Sector Index Fund lost 4.7 percent.

Alcoa Inc fell 2.5 percent to $15.97 ahead of the company's quarterly results after the market closes. The report marks the unofficial start to earnings season and many investors have bet strong results will offset macro-economic pressures.

For a video on the upcoming season, see: http://link.reuters.com/caw52s

Earnings take on increased significance with all these macro issues going on, and it could potentially be a positive for investors to get behind if Alcoa gives a good number, said Walter Todd, who helps manage $950 million at Greenwood Capital in Greenwood, South Carolina.

Todd added that recent equity gains heighten the pressure for earnings to be good.

News Corp shares dropped 7.1 percent to $15.56 on heavy volume as Britain looked for a way out of approving the company's multibillion-dollar deal to buy broadcaster BSkyB amid a phone-hacking scandal.

On the upside, Arch Chemicals gained 11.5 percent to $47 after Lonza agreed to buy the company for $1.2 billion.

(Reporting by Ryan Vlastelica; Editing by Jan Paschal)

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