NEW YORK (MarketWatch) -- A downgrade of Spain's debt rating rekindled investors' broader fears about European credit sparking a sharp decline in stocks in the last session of May, which saw the market's worst monthly drop since February 2009.

Trading was especially volatile in the afternoon after Fitch Ratings lowered its rating on Spain's debt to AA+ from AAA, but said the country's outlook is stable. The downgrade came despite this week's passage of austerity measures by the Spanish government -- a move that bulls had hoped would help the country avoid struggles similar to those of Greece. See full story.

The Dow Jones Industrial Average DJIA, +1.19% fell 122.36 points, or 1.2%, to 10136.63, led by declines of more than 2.5% each in 3M MMM, +0.23% , Bank of America BAC, +1.34% and Walt Disney DIS, -1.05% .

Industrials weakened as fresh euro-zone concerns reignited worries that global demand may wane. Boeing BA, +1.01% fell 1.5%, while Caterpillar CAT, +1.18% was off 2.1%.

Traders and analysts have recently become less concerned about the chances of a chain reaction of defaults by heavily indebted euro-zone members that might jolt the global financial system. But they're becoming more concerned about a long slog for the continent before it returns to full economic health.

"It's looking to us like Europe's problems won't necessarily spread, but they are something the rest of the world is going to feel" in coming months, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Regarding the Spain downgrade, he added: "I really thought the steps they'd taken would keep the ratings agencies at bay. This is a big disappointment."

May sale

The Dow ended down 7.9% for May, its biggest monthly drop since February 2009, when it was still on its way to the lows of the last bear market. The measure also snapped a three-month winning streak and set its worst percentage performance for May since 1962.

Volume was light ahead of a three-day weekend. Composite turnover in New York Stock Exchange-listed companies hit 5.1 billion shares, well below the month's average daily volume of nearly 7 billion shares.

The relatively light trading hasn't prevented big swings in major averages, however. The Dow was off as much as 163 points following Spain's credit downgrade, then recovered to trade less than 70 points lower before settling into a relatively narrow range.

Doug Prskalo, a trader for Blue Capital Group active on the floor of the Chicago Board Options Exchange, said the Spain news forced many participants to reevaluate their plans for the weekend, with many either deciding not to hold positions or to buy options as a form of protection in case of any nasty surprises while major U.S. exchanges are closed the next three days.

"There's been just a little more oomph to the trading since Spain was downgraded," said Prskalo. "Europe wasn't a big concern earlier in the day, but it is now."

The Nasdaq Composite COMP, +0.74% tumbled 0.9% to 2257.04, off 8.3% for May, its worst monthly decline since November 2008.

The Standard & Poor's 500 SPX, +0.82% slipped 1.2% to 1089.40, down 8.2% for May, its worst performance since February 2009.

The euro slipped after the Spanish debt downgrade, with the common currency recently trading at $1.2280, from $1.2362 late Thursday.

The U.S. Dollar Index DXY, -0.10% , tracking the U.S. currency against a basket of six others, jumped 0.6%.

Treasury prices also rose, pushing the yield on the 10-year note down to 3.303%.

Crude-oil futures fell just below $74 a barrel to end the month down 14.1%, the worst showing since December 2008.

Data showed consumer spending was flat last month. U.S. business activity expanded at a slower-than-expected pace in May, according to a survey of Chicago-area purchasing managers.

"One of the intermediate-term concerns the market has here is if the global market recovery is intact with the same trajectory or are there some signs it's beginning to fray at the edges?" asked Jim McDonald, chief investment strategist at Northern Trust Global Investments.

In other economic data, consumer-sentiment levels ticked higher in May, according to the final Reuters/University of Michigan consumer-sentiment index.

Among stocks in focus, American depositary shares of BP BP, -1.18% fell 5.4% as the company continued efforts to cap a leaking oil well in the Gulf of Mexico.