NEW YORK (CNNMoney.com) --
Stocks fell Tuesday after Standard & Poors cut Greece's debt rating to junk and lowered Portugal's debt rating, raising fears that a euro zone debt crisis could slow the global economic recovery.
The Dow Jones industrial average (INDU) tumbled 213 points, or 1.9%, closing below 11,000, a key psychological level. The Dow ended the previous session at its highest point in 19 months.
The slide was the Dow's biggest one-day point drop since July 15, 2009 when it lost 257 points.
The S&P 500 index (SPX) fell 28 points, or 2.3%, closing below 1200, a psychological level traders look at. The Nasdaq composite (COMP) slid 51 points, or 2%.
Stocks were flat to lower in the morning as Goldman Sachs' sought to defend itself on Capitol Hill against allegations it profited from the housing market collapse. But news that ratings agency Standard & Poor's had cut Greece and Portugal's debt ratings overshadowed everything else, giving investors a reason to retreat on the back of an 8-week advance.
"We're seeing the fear factor kick in about Greece and Portugal," said Peter Cardillo, chief market economist at Avalon Partners. "That's rattling the market."
He said that fear was also reflected in the so-called flight to quality as investors poured money into bonds and the euro fell to a new low for the year.
That was reflected by a jump in the CBOE Volatility index, Wall Street's so-called "fear gauge," which spiked 17% after briefly touching highs not seen since February. Typically a surge in the VIX corresponds with a selloff in stocks.
Greece: Standard & Poor's cut its ratings on Greece's long-term debt status to "BB+" with a negative outlook from "BBB+." The double-B plus rating is considered to be speculative or "junk," and reflects the ratings agency's concern about Greece's long-term ability to get out from underneath the its current fiscal crisis. S&P cut Greece's short-term debt even lower.
S&P also cut Portugal's long-term debt ratings by two notches and the short-term rating by one notch, but did not lower the debt to junk status.
The cost of insuring both Greece and Portugal's debt rose to record highs following the news.
Worries about the fiscal health of Greece and the other so-called PIIGS have weighed on the stock market on and off since the start of the year as investors worry the weakness will destabilize the euro and hurt global growth. The PIIGS are Portugal, Ireland, Italy, Greece and Spain.