Stocks in the U.S. and Europe are sinking Tuesday following political turmoil in Italy, which stoked fears of instability in the euro bloc.

Investors dumped Italian government bonds, driving borrowing costs sharply higher for that country and rekindling fears of more financial strain for weaker European nations.

Meanwhile, prices for U.S. government bonds surged as investors shifted money into lower-risk investments.

The steep drop in U.S. bond yields is causing big losses for banks. Lower yields force interest rates down on mortgages and other kinds of loans, meaning thinner profits for financial institutions. Major exporters like technology and industrial companies are also falling.

The political upheaval in Italy is likely to lead to new elections in the coming months, and while it’s not clear if Italy would leave the euro, investors are interpreting the new vote as a referendum on Italy continuing to use the currency. That has major implications for the European financial system and its economy.

“Eurozone membership will be at the forefront of the next election,” said Alicia Levine, the head of global investment strategy at BNY Mellon Investment Management. “Should Italy leave the eurozone, it’s clearly bad for European assets and it’s bad for the European banking system.”

Investors sold stocks, especially companies that depend on strong sales outside the U.S. like technology and industrial companies and big drug and health care products makers. They bought government bonds in the U.S. as well as Germany and the U.K. That sent prices for those bonds higher and yields lower.

The S&P 500 index sank 41 points, or 1.5 percent, to 2,679 as of 3:30 p.m. Eastern time. The Dow Jones industrial average lost 470 points, or 1.9 percent, to 24,282. It was down as much as 505 earlier. In Europe, Italy’s benchmark stock index plunged 2.7 percent.

Smaller U.S. companies, which tend to be more domestically focused than the large multinationals in the Dow, fared much better than the rest of the market. The Russell 2000 index fell just one-fourth as much as the Dow average, giving up 7 points, or 0.5 percent, to 1,619.

The Nasdaq composite fell 63 points, or 0.9 percent, to 7,370.

U.S. markets were closed Monday for the Memorial Day holiday.

Italian President Sergio Mattarella picked Carlo Cottarelli for prime minister after the anti-establishment 5-Star Movement and right-wing League refused to withdraw an anti-euro candidate as economy minister. That ended their attempt to establish a government after inconclusive elections in March. Cottarelli is likely to lose a vote of no confidence in parliament, which would mean another round of elections.

Investors dumped Italian stocks and bonds as a result. Yields on Italian government bonds soared as their prices declined. The yield on the 10-year Italian government bond jumped to 3.10 percent from 2.69 percent, a huge move. At the beginning of May the yield was just 1.78 percent. The sharp move higher reflects weakening confidence among investors in Italy’s government.

The German DAX lost 1.5 percent and Britain’s FTSE 100 and the French CAC 40 both sank 1.3 percent. Some of the worst losses went to European banks: Germany’s Deutsche Bank dropped 6.5 percent to $11.27 and Banco Santander of Spain lost 9.7 percent to $5.28.

“Uncertainty and the unknowns themselves affect the real economy,” said Levine, of Bank of New York Mellon. “You’ve going to have less investment, you’re going to have a decline in consumer spending, you’ve going to have, on the margin, less consumer activity affecting growth.”

New jitters about the stability of the euro sent the currency’s value against the dollar to its lowest level in almost a year. The dollar rose to 108.24 yen from 109.37 yen. The euro sank to $1.1531, its lowest since July, from $1.1669.

Spain was facing political turbulence of its own. That country’s parliament will hold a vote of no confidence in Prime Minister Mariano Rajoy after graft convictions of businesspeople and officials tied to his conservative Popular Party. The Spanish IBEX 35 sank 2.5 percent.

U.S. government bond prices jumped as investors moved money into lower-risk assets. The yield on the 10-year Treasury fell to 2.77 percent, its lowest since early April, from 2.93 percent. That sent interest rates sharply lower, which reduces profits for banks. JPMorgan Chase dropped 5 percent to $105.17 and Bank of America fell 4.7 percent to $28.75.

U.S. crude oil fell 1.7 percent to $66.73 a barrel in New York. Oil prices have slumped in the last week following reports that OPEC countries and Russia could start pumping more oil soon. Brent crude, used to price international oils, rose 0.1 percent to $75.39 a barrel in London.

Wholesale gasoline gave up 1.7 percent to $2.14 a gallon. Heating oil shed 1.1 percent to $2.19 a gallon. Natural gas dropped 2.2 percent to $2.88 per 1,000 cubic feet.

Gold fell 0.4 percent to $1,299 an ounce. Silver lost 1 percent to $16.37 an ounce. Copper gave up 0.5 percent to $3.06 a pound.

In Asia, Japan’s Nikkei 225 fell 0.6 percent while the South Korean Kospi lost 0.9 percent. Hong Kong’s Hang Seng index plunged 1 percent.

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