Pat Dollard

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NEW YORK (Reuters) – The stock market tumbled in heavy volume on Monday as Standard & Poor’s downgraded the credit outlook of the United States, adding to worries about the global economy after China moved to curb liquidity.

Investors also focused on Greece, where financial markets are increasingly convinced the country will have to renegotiate the terms of its public debt. Greek officials denied that some form of debt rescheduling was imminent.

The S&P 500 fell below 1,300 for the first time since March 24, and some in the market see a close below that level as a trigger of future losses. Short-term support is seen near the 1,285 area.

The CBOE volatility index (Chicago Options:^VIX – News), better known as Wall Street’s fear gauge, surged more than 17 percent, its largest percentage jump since March 16. It closed on Friday at its lowest since July 2007.

“The global economy is becoming increasingly unstable yet investors in the U.S. have been either excessively optimistic at worst or at best, complacent,” said Bruce Bittles, chief investment strategist of Robert W. Baird & Co in Nashville.

“The VIX made a new cycle low on Friday in spite of all the problems in the global economy. What that means is the market is vulnerable to any surprise news and that’s exactly what happened today,” he said.

S&P downgraded its outlook on the United States credit rating to negative, saying it believes there’s a risk U.S. policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

The stock market’s vulnerability was demonstrated by its strong sell-off. Comparatively, the reactions of the U.S. Treasury debt and dollar markets were more subdued.

On Friday, the S&P 500 fell for a second week as concern spread that growth expectations may have to be trimmed.

As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities (^GSPU – News), consumer staples (^GSPS – News) and healthcare (^GSPA – News) posted the smallest losses in Monday’s slide.

The Dow Jones industrial average (DJI:^DJI – News) dropped 213.58 points, or 1.73 percent, to 12,128.25. The Standard & Poor’s 500 Index (^SPX – News) lost 21.31 points, or 1.61 percent, to 1,298.37. The Nasdaq Composite Index (Nasdaq:^IXIC – News) fell 51.28 points, or 1.85 percent, to 2,713.37.

Caterpillar Inc (NYSE:CAT – News), hurt both by expectations of ballooning funding costs and China’s move to harness liquidity, slid 4.2 percent to $102.73.

Among the companies reporting earnings on Monday, Halliburton Co (NYSE:HAL – News), the world’s second-largest oilfield services company, gained 1.7 percent to $47.63, and drugmaker Eli Lilly (NYSE:LLY – News) fell 1.4 percent to $35.50. Citigroup Inc (NYSE:C – News) rose 0.7 percent to $4.45.

China raised banks’ required reserves on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world’s second-largest economy.

China’s move and the cut in the U.S. credit outlook hurt basic materials and crude prices, sending the Reuters/Jefferies CRB index of commodities (^CRB – News) down 1 percent. U.S. crude oil futures dropped 2.5 percent to $106.93 per barrel.

Shares of mining company Freeport-McMoRan Copper & Gold Inc (NYSE:FCX – News) fell 2 percent to $50.15 while Dow component Alcoa Inc (NYSE:AA – News) fell 3.5 percent to $15.94.