Stocks fell early Wednesday as policymakers warned Europe's debt crisis posed dangers to the global economy and on signs the contagion was starting to spread to larger European nations.

The yield spread of 10-year French government bonds over their German equivalents widened to a euro-era high on fears the crisis was moving to economies that had been considered more isolated from the problems.

Bank of Japan Governor Masaaki Shirakawa said the crisis was already affecting emerging nations and Japan in multiple ways, while the Bank of England forecast Britain was on the brink of a contraction and warned against inaction.

In what has become a familiar risk off trade, cyclical sectors of the stock market that are more sensitive to signs of economic weakness were among the worst performers. The S&P materials sector fell 1.1 percent.

But reflecting a belief by some U.S. investors that equities may be able to weather the storm, Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, said while the crisis would affect some U.S. companies he believed it would be slight.

I believe that market participants are really overreacting to the turmoil in Europe, he said. The impact of the euro zone will have some effect on U.S. corporations, particularly S&P 500 companies with respect to their exports.

The Dow Jones industrial average dropped 116.40 points, or 0.96 percent, to 11,979.76. The Standard & Poor's 500 Index fell 12.24 points, or 0.97 percent, to 1,245.57. The Nasdaq Composite Index lost 25.10 points, or 0.93 percent, to 2,661.10.

The European Central Bank bought euro zone government bonds to stop a selloff, traders said. European equities rose on the move, then lost ground as the yield on Italian 10-year bonds continued to hover near 7 percent.

U.S. equity investors have closely watched European sovereign debt prices and the euro currency, which are currently barometers of risk aversion for the wider market. Trading has been volatile, with large intraday swings as sentiment oscillates with developments is Europe.

Still, U.S. stocks have shown resilience, clinging to the higher end of their recent trading range at around 1,250 on the S&P 500. Traders watched for a break below 1,230 as a potential warning sign.

In U.S. company news, Dell Inc, the computer maker, missed quarterly revenue estimates, and said full-year revenues could be hurt by an industrywide shortage of hard drives. The shares fell 1.9 percent to $15.34.

Shares of Abercrombie & Fitch Co slumped 12.6 percent to $48.72 after the teen clothing retailer's quarterly profit missed estimates by a huge margin.

Target Corp posted higher quarterly profit on higher food sales and as a 5 percent discount to cardholders drew shoppers. The shares rose 2.1 percent to $54.33.

(Editing by Jeffrey Benkoe)

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