Debt fears drive down US stocks

The Dow Jones Industrial Average fell 94.57 points (0.76 per cent) to close at 12,385.16.

The broader S&P 500 dropped 10.70 points (0.81 per cent) to 1,305.44, while the tech-heavy Nasdaq Composite slid 24.69 points (0.89 per cent) to close at 2,765.11.

The sell-off came as top Democratic and Republican senators were struggling to forge a compromise deal to raise the federal government's debt ceiling by August 2 in order to avert a potentially disastrous default.

"The US equity markets are being stymied by the inability of lawmakers to resolve the debt ceiling issue," analysts from Charles Schwab said in a daily market commentary.

On the other side of the Atlantic, the eurozone's leaders were preparing for an emergency summit on Thursday aimed at preventing a default by Greece, which could have destabilizing effects on larger European economies.

The latest round of European bank stress tests, conducted by European Union regulators last week, failed to boost confidence in the continent's banking system, as financial stocks were punished worldwide.

Bank of America, the largest US bank in terms of deposits, saw its shares fall 2.8 per cent on the New York Stock Exchange on Monday, while Citigroup dropped 1.7 per cent.

Gold hit record highs amid the uncertainty, reaching as high as $1,607.45 per troy ounce in intraday trading.

The grim headlines have threatened to overshadow the release of companies' second-quarter earnings this week, which many analysts believe could give a boost to the stock market.

Oil-services giant Halliburton eked out a gain of only 0.1 per cent for the day, despite reporting that its profits had jumped 54 per cent in the second quarter compared to the same period last year.

Three major US banks -- Bank of America, Wells Fargo and Goldman Sachs -- are set to report their results on Tuesday, along with other major companies such as Coca-Cola, Johnson & Johnson, Yahoo! and Apple.

Shares of News Corp. dived 4.3 per cent on the Nasdaq as the troubled media giant faced a deepening crisis over its phone-hacking scandal in Britain, with a prominent former executive, Rebekah Brooks, arrested over the weekend.

Bond prices fell slightly. The yield on the 10-year Treasury hovered at around 2.91 per cent, unchanged from late Friday, while that on the 30-year bond climbed to 4.29 per cent from 4.25 per cent.

Bond prices and yields move in opposite directions.