NEW YORK (Reuters) - A wave of fear that Europe’s debt problems are spreading out of control unnerved markets on Monday, knocking the euro to its lowest level in two months against the dollar and dragged down equities in Europe and the United States.

Euro notes are spread out at a bank branch in Madrid January 13, 2011. REUTERS/Andrea Comas

Ratings actions on Greece and Italy and regional election results in Spain that raised doubts about measures to curb the country’s deficit spurred investors to unload riskier assets.

Following a three-notch cut of Greek debt by Fitch Ratings on Friday, which pushed the country’s rating deeper into junk status, rival Standard & Poor’s revised its outlook for Italy to “negative” from “stable” on Saturday.

“We have a confluence of negative events that have taken place over the weekend. All of that is compounding to create this toxic mix for the euro.” said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

Investors reversed bullish bets and sought safer havens, shifting funds into U.S. government debt, gold and the dollar.

Commodities suffered another rout as the dollar strengthened, with oil prices slumping 2.4 percent and copper, grains, sugar and cocoa also falling.

U.S. stocks closed at their lowest levels in a month. The Dow Jones industrial average .DJI fell 130.78 points, or 1.05 percent, to 12,381.26. The Standard & Poor's 500 Index .SPX was down 15.90 points, or 1.19 percent, to 1,317.37 and the Nasdaq Composite Index .IXIC slumped 44.42 points, or 1.58 percent, to 2,758.90.

“Unlike before, I don’t see the market brushing off the European issues this time because there are heightened concerns about the global industrial slowdown,” said James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

Increasing doubts that equity markets can weather recent weakness in global manufacturing and demand added to the weakness after Germany and China reported disappointing manufacturing figures.

Industrial, energy and technology stocks, closely related to growth, were among the day’s top decliners.

The pan-European FTSEurofirst 300 index hit a five-week closing low and turned negative for the year, losing 1.7 percent to end at 1,116.52 points. Emerging market equities .MSCIEF slumped 2.3 percent and leading world stocks .MIWD00000PUS fell 1.8 percent, the biggest daily decline in more than two months.

The euro fell to a record low against the safe-haven Swiss franc. Against the dollar it fell as low as $1.3968, its weakest showing since mid-March, after breaking below $1.40, a key psychological level and roughly its 200-week moving average. The euro was last down 0.7 percent against the dollar at $1.4048.

Against the Japanese yen, the dollar rose 0.38 percent to 82 yen.

The dollar index .DXY rose nearly 1 percent, which dented commodity prices and shares of commodity-sensitive shares. Alcoa Inc AA.N lost 1.8 percent to $15.98. Freeport-McMoRan Copper & Gold FCX.N fell 2 percent to $47.42.

U.S. light sweet crude oil fell $2.40, or 2.4 percent, to settle at $97.70 per barrel, and gold rose $4.69 to $1,516.20 an ounce.

A stronger dollar often pressures dollar-denominated oil prices by raising the price for consumers using other currencies and pulling investment from commodities.

Chevron Corp CVX.N dipped 1.2 percent to $101.37, while the PHLX oil service sector index .OSX shed 2.2 percent.

Europe’s crisis appeared to deepen as the ruling Spanish Socialists were hit by stinging losses in local elections and now face walking a tightrope between voter anger over sky-high unemployment and investor demands for strict austerity measures.

Investors are increasingly concerned that voter rebellions against austerity plans could cause bailouts and budgetary pact agreements to unravel, leaving large swathes of debt in jeopardy of default.

Speculation also mounted over a possible restructuring of Greek debt, pressuring the euro.

Greek Prime Minister George Papandreou discussed new emergency measures to cut Greece’s deficit in a bid to convince leaders the country can avoid a restructuring.

The premiums charged by investors to hold Italian and Spanish 10-year bonds rather than safe-haven German bunds rose to their highest levels since January, at 186 and 261 basis points respectively.

Government bonds outside the euro-zone periphery rallied as investors sought higher-quality and easily traded assets.

Benchmark 10-year Treasury yields edged lower by 0.02 percentage point to 3.13 percent, after earlier touching a five-month low of 3.09 percent.

“The key point is that the crisis seems to be taking hold even of peripheral countries regarded as solid,” said WestLB rate strategist Michael Leister. “Sentiment is that there appears to be no end to it now Italy is being scrutinized by the ratings agencies.”

Also on Monday, Fitch became the second rating company to threaten Belgium with a credit downgrade, saying its lack of a fully fledged government undermined budget efforts in one of the euro zone’s most indebted states. Belgium, however, sold 3.4 billion euros of bonds with relative ease on Monday, and Fitch said it still had many characteristics of a stronger “core” euro zone member.