Stocks were little changed in choppy trading after being lower on Monday as Europe's debt problems dominated investors' concerns, with the focus heavily on Italy's political turmoil.

Italian Prime Minister Silvio Berlusconi defied pressure to resign as he struggled to hold a crumbling center-right coalition, with markets on edge before a key parliamentary vote on budget reforms.

Italian government bond yields rose to their highest since 1997 -- approaching levels regarded as unsustainable -- as political turmoil in Rome threatened to drag the euro zone's third largest economy deeper into regional debt crisis.

Adding to the uncertainty, Greece's outgoing Socialist prime minister and conservative opposition leader raced to forge a coalition government and implement a new bailout program.

Equities have been very sensitive to headlines from Europe, especially with a light U.S. economic calendar this week and as earnings season winds down.

The CBOE Volatility Index VIX, Wall Street's fear gauge, added 5.4 percent to 31.79. Fresh worries about sovereign debt default have boosted the stock market's volatility.

Both cross-asset correlation and volatility contagion increased between equities and sovereign debt, said Mandy Xu, equity derivatives strategist at Credit Suisse in New York.

The volatile spillover impact from sovereign debt is now approaching the highs we saw in July during the second Greek bailout discussion.

The Dow Jones industrial average was up 1.97 points, or 0.02 percent, at 11,985.21. The Standard & Poor's 500 Index was down 0.13 point, or 0.01 percent, at 1,253.10. The Nasdaq Composite Index was down 6.55 points, or 0.24 percent, at 2,679.60.

Financials and industrial stocks were the biggest decliners, with the S&P financial sector off 0.9 percent and the capital goods group off 0.7 percent. Bank of America Corp lost 2.3 percent to $6.34.

Warren Buffett's conglomerate, Berkshire Hathaway Inc, reported a smaller third-quarter profit late Friday after losing more than $2 billion on derivatives related to stock market performance. The Class B shares fell 1.4 percent to $76.13.

Consumer electronics chain Best Buy Co Inc lost 3.3 percent to $26.40 after the consumer electronics chain said it was buying British partner Carphone Warehouse Group Plc for $1.3 billion and scrapping plans for a chain of European megastores.

About 3.2 billion shares traded so far on the New York Stock Exchange, the American Stock Exchange and Nasdaq, slightly below average.

On the NYSE, decliners beat advancers by a ratio of 3-to-1, and on the Nasdaq, the ratio stood at 3-to-1.

(Reporting by Angela Moon; editing by Kenneth Barry)

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