U.S. stocks notch worst day of year as Greek crisis escalates

New York • Fears that Greece's troubles could spread through the global financial system shook markets on Monday, driving U.S. stocks to their worst day of the year.

Investors fled from stocks in Europe and the U.S. and retreated to the safety of government bonds. Measures of volatility spiked. In many ways, it looked similar to previous episodes in Europe's long-running debt crisis, except that this time, investors said, they weren't quite as worried.

A series of events over the weekend left Greece perilously close to defaulting on its debts. Greece's Prime Minister, Alexis Tsipras, said his government would hold a referendum on budget proposals made by the country's lenders. European officials refused to extend the country's bailout program, which expires on Tuesday, the same day it's supposed to make a debt payment to the International Monetary Fund.

Jeff Carbone, a senior partner at Cornerstone Financial Partners, said the real worry isn't so much Greece, a country with an economy roughly the size of Missouri's. "It's the contagion risk. If Greece goes, who's next? This isn't about Greece; it's what happens next."

The Standard & Poor's 500 index dropped 43.85 points, or 2.1 percent, to 2,057.64. The Dow Jones industrial average lost 350.33 points, or 2 percent, to 17,596.35, and the Nasdaq composite fell 122.04 points, or 2.4 percent, to 4,958.47.

The losses wiped out all the gains for the Dow and S&P 500 indexes this year.

In Europe, Germany's DAX lost 3.6 percent while France's CAC-40 lost 3.7 percent. The FTSE 100 index of leading British shares fell 2 percent. Greece's stock market was closed. Investors bought German and British government bonds, which are seen as safe havens, and sold bonds issued by Greece's government, sending those yields sharply higher.

"We are really looking at a situation where the market doesn't know what the fallout is going to be," said David Lafferty, chief market strategist at Natixis Global Asset Management. "But the U.S. market feels that it is relatively contained at this point."

Over the weekend, the European Central Bank refused to extend its emergency support for Greece's banking system. That prompted the Greek government to close banks and announce limits on withdrawals.

Pictures of long lines at bank machines in Athens appeared on television screens around the world.

"Whenever you see any kind of bank line, there is in the back of investors' mind the thought: 'What if it spreads? What if people panic?'" said Karyn Cavanaugh, senior market strategist at Voya Investment Management. "What's going on in Europe, of course it's going to roil markets in the short term," But for U.S. investors, she said, "the long-term impact is not that big of a deal."

The last time Greece's troubles shook U.S. markets, there were plenty of other problems. In 2012, Spain had entered a recession, and the worry was that it was too big of a country to rescue.