Stocks suffered their worst day in nearly a month on Monday as concern about the stalemate in U.S. budget talks and growing debt problems in the euro zone prompted investors to hedge against further losses.

The S&P 500 dropped nearly 2 percent on concerns that Europe's debt crisis would spread to Italy. European officials were still struggling to solve Greece's fiscal problems as Italy's markets have been roiled by worry about its banks.

Today's decline is not necessarily the start of a correction, but suggests we are in for a wild ride this week,

said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research in Austin, Texas.

The euro zone's woes added another layer of uncertainty to the stock market already rattled by Friday's exceptionally weak jobs report.

What's happening today is something that should have happened on Friday. The disappointing jobs report on Friday on top of all the concerns on budget talks and Europe have prompted the sell-off, Frederick said.

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 15.3 percent.

The Dow Jones industrial average <.DJI> was down 151.44 points, or 1.20 percent, at 12,505.76 at the close. The Standard & Poor's 500 Index <.SPX> was down 24.31 points, or 1.81 percent, at 1,319.49. The Nasdaq Composite Index <.IXIC> was down 57.19 points, or 2.00 percent, at 2,802.62.

The S&P 500, which lost its gains for the month, was near its 100-day and 50-day moving averages, both around the 1,316 level. The Dow and the Nasdaq remained modestly in the plus column.

Dashing hopes for a deal on larger-than-expected spending cuts to tame the U.S. budget deficit, 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.

ALCOA SHINES LATE

After the bell, Alcoa Inc , often viewed as a bellwether of the U.S. economy, posted a big jump in second-quarter profit partly due to soaring prices for aluminum and its raw material alumina. The Dow component's stock rose 0.3 percent to $15.96 in extended-hours trading.

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During the regular session, financials and other economically sensitive stocks led the day's broad decline. Bank of America Corp lost 3.3 percent to $10.35 while Freeport McMoRan Copper & Gold Inc slid 3.3 percent to $53.30. An S&P financial index <.GSPF> dropped 2.8 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 6.2 percent while the MSCI Europe Financials Sector Index Fund lost 4.6 percent.

News Corp shares dropped 7.6 percent to $15.48 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.

Volume was light, with about 6.55 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's daily average of 8.47 billion.

About six stocks fell for every one that rose on the New York Stock Exchange. On the Nasdaq, nearly five stocks fell for every one that rose.

(Reporting by Angela Moon, Editing by Jan Paschal)

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