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Dow sinks more than 440 points as Italy's political crisis triggers global sell-off

Markets plunged worldwide Tuesday as investors worried that a growing political crisis in Italy could lead to its withdrawal from the Eurozone in a replay of Britain's vote to exit two years ago.

The Dow Jones industrial average was down more than 440 points - about 1.8 percent - in early afternoon trading Tuesday on worries that the Italian crisis could bleed throughout the Eurozone.

The Standard & Poor's 500-stock index, tech-heavy Nasdaq Composite and Russell 2000 all suffered losses Tuesday as the concerns in Italy spread to U.S. traders.

Investors sold out of bonds in the southern European counties and the Italian banks and stock markets were hit on worries that Italians might eventually ditch the euro. The Italian and Spanish stock markets were suffering the worst, with stock market drops in the 2.5 percent range.

European currencies were losing ground agains the dollar, while the major stock indexes - Stoxx Europe 600, Britain's FTSE 100 and Germany's DAX - were in negative territory.

"We got a lot going on," said Chris Gaffney, president of EverBank world markets. "The fear is that the next Italian election will strengthen the 'euroskeptics' and lead to a call for Italy to exit the European Union."

Investors are worried that Italy could become another Greece, which required bailouts by the International Monetary Fund and European Central Bank between 2010 and 2015.

"Part of the issue in today's market stems from the fact that Moody's threatened to downgrade the sovereign credit rating of Italy on Friday," said Wayne Wicker, chief investment officer at ICMA Retirement. The downgrade caused borrowing costs for Italy to soar, with the nation's yield on its government debt surging.

Italian President Sergio Mattarella on Sunday blocked the formation of a coalition government, raising the prospect that a populist coalition could gain ground and lead to an exit from the Eurozone. Some have dubbed the movement "Quitaly" and "Italexit" in a play on Brexit from its neighbor to the north.

Italy, which like Spain and Greece suffers from heavy debt, saw the yield on its debt rise dramatically as investors fled to the safety of the dollar and U.S. Treasury bonds. But Italy's economy is Europe's third largest and could be much harder for its fellow Eurozone members to tame than was the Greek crisis.

Economist Mohamed El-Erian said on CNBC Tuesday morning that the worldwide synchronized economic boom might not be what people thought.

"People are now realizing the only economy with real legs to it was the U.S. economy," El-Erian said on the show.

The gap between Italian and German 10-year bond yields closed at the widest spread in four years, another indication of political risk to the Eurozone.

"This action in bond markets has now spread to equities as investors are reminded of some of the geopolitical concerns that remain in Europe," Wicker said.

"Although a major exit from the Eurozone, such as Italy leaving, would be a negative for the stability of markets, as long as the Eurozone remains in place - which I believe is likely - then markets should eventually return to normal," said Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, in an email.

Zaccarelli said that although the Italian imbroglio may be temporary, "crises and contagion often start in a small way and then move in unpredictable ways. Some caution is warranted."

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