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

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People line up at ATMs outside a National bank branch in the northern Greek port city of Thessaloniki, Monday, June 29, 2015. Anxious Greeks lined up at ATMs as they gradually began dispensing cash again on the first day of capital controls imposed in a dramatic twist in GreeceÕs five-year financial saga. Banks will remain shut until next Monday, and a daily limit of 60 euros ($67) has been placed on cash withdrawals from ATMs . (AP Photo/Giannis Papanikos)

NEW YORK » Stocks are closing with their biggest losses of the year as investors worry about fallout from Greece’s worsening debt crisis.

Greece is moving closer to defaulting on its debt and could be forced to abandon the euro currency.

The Dow Jones industrial average dropped 350 points, or 2 percent, to 17,596 Monday.

The Standard & Poor’s 500 index sank 43 points, or 2.1 percent, to 2,057.

The Nasdaq composite tumbled 122 points, or 2.4 percent, to 4,958.

European markets fell even more. Stocks fell 3.6 percent in Germany and 3.7 percent in France.

Bond prices rose sharply as investors sought safety. The yield on the 10-year Treasury note fell to 2.32 percent.

“We finally reached the breaking point,” said Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles. “With so much uncertainty around a potentially negative outcome, the knee-jerk reaction will be to reduce risk assets. You have a potentially very ugly situation this week.”

Greece closed its banks and imposed capital controls, a measure that will deepen the country’s recession and risk driving it toward an exit from the euro. Talks over bailout aid with international creditors collapsed late Friday, as Prime Minister Alexis Tsipras unexpectedly called a July 5 referendum on the austerity demanded by creditors. The European Central Bank froze the level of emergency aid available to Greek lenders Sunday.

U.S. stocks extended losses in afternoon trading as S&P cut its rating on Greece, with a negative outlook, and said the probability of the country exiting the euro zone is about 50 percent.

“There was an expectation that something would break positively at the last minute, but it appears it’s going to be a little messier than that,” Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, New Jersey. “As things get worse with the Greek economy — social unrest, nervousness and the possibility of an EU exit — there’s the potential for even more weakness.”

Gauges of stock volatility surged around the world as the weekend meltdown in Greece collided with China’s market unraveling and traders bought hedges to stanch the bleeding. The CBOE’s volatility index, known as the VIX, reached its highest level since February and erased its decline for the year.

The tumble in U.S. equities jolted traders out of a two- month torpor, as many had shrugged off the drama unfolding in Greece. The S&P 500 hasn’t had a weekly move of more than 1 percent since April, and the last time it had a single-day move of more than 2 percent was Dec. 18.

The benchmark’s decline Monday left it down for the last three months, threatening to halt a streak of nine straight quarterly gains, the longest run since 1998. The S&P 500 has dropped for four straight days, the longest stretch of losses since March.

The Greek financial crisis provides a good opportunity for investors to snap up U.S. stocks, says Morgan Stanley chief U.S. equity strategist Adam Parker. The current level of U.S. economic strength should be enough to make stock investors look past temporary worries over Greece, especially with earnings coming up next month, he said.

“I want to buy this dip right now,” Parker said in a television interview on “Bloomberg Markets” with Olivia Sterns and Scarlet Fu. “A couple of weeks from now when earnings kick off you’ll probably go a whole day on Bloomberg without mentioning the word Greece.”

Leon Cooperman, the founder of the $9.2 billion Omega Advisors, said he sees less than a 50 percent chance of Greece leaving the euro zone.

The turmoil in Greece prompted questions about the outlook for higher U.S. interest rates.

“It’s possible that the Fed won’t be in as much of a hurry to raise rates” John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion, said by phone. “

Federal Reserve Bank of New York President William Dudley said in an interview with the Financial Times that a September interest-rate increase is ‘’very much in play,’’ after recent stronger-than-forecast data.

The Associated Press and Bloomberg News contributed to this story.

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