The dollar rose 0.6 percent against an index of global currencies Monday. The euro dipped briefly to its lowest level against the dollar in two months.
The bad news began late Friday, when the Fitch ratings agency downgraded Greece's debt further into junk status. That intensified investors' fear that the country would need more help managing its debts beyond the emergency loan package it received last year.
Then Standard & Poor's said Saturday that Italy was in danger of having its debt rating lowered if it could not reduce its borrowing and improve economic growth. The next day, Spain's ruling Socialist party was roundly defeated in local elections, potentially jeopardizing the country's deficit-cutting program.
The Dow fell 130.78 points, or 1.05 percent, to close at 12,381.26. The Standard & Poor's 500 index fell 15.90, or 1.19 percent, to 1,317.37. All but a handful of stocks in the S&P 500 fell. The Nasdaq composite index fell 44.42, or 1.58 percent, to 2,758.90.
European markets also closed sharply lower. The FTSE 100 index of leading British shares fell 1.9 percent. Germany's DAX lost 2 percent. The CAC-40 in France was 2.1 percent lower.
While stocks are reacting strongly to the weekend's headlines, investors are not selling corporate bonds. If they were, it would signal that investors were growing wary of risk, said Jack Ablin, chief investment officer at Harris Private Bank.
"There's a short-term perception of risk, but I'm not viewing it as necessarily lasting," Ablin said.
Some analysts think a downturn in stocks was overdue. Markets have wobbled over the last few weeks, but the Dow is still up nearly 7 percent this year. The index has shrugged off revolutions in the Arab world, attempts by China and other emerging markets to slow growth, and the nuclear crisis in Japan.
Downgrades of sovereign debt can shock world markets when they are announced. Recently, debt downgrades have had a short-term effect. Moody's downgraded Spain's debt March 10. The Ibex 35 sank 1.3 percent on the news but recovered its losses within days.