WALL Street plunged overnight after ratings agency Standard & Poor's issued its first warning on US debt, citing Washington's inability to tackle looming fiscal deficits.

In closing trade, the Dow Jones Industrial Average was down 140 points (1.14 per cent) to 12,201.52, while the tech-heavy Nasdaq Composite skidded 1.06 per cent to 2735.38.

The broad-market S&P 500 stock index shed 14.56 points (1.10 per cent) at 1305.12.

Shortly before the market open, Standard & Poor's revised its outlook on US sovereign debt to "negative" from "stable" - the first ever challenge to Washington's top-line AAA grading.



The price of gold struck a record high just short of $US1,500 after the move. The precious metal, a traditional safehaven store of value in troubled times, reached $US1,497.23 an ounce on the London Bullion Market, before easing back.



Voicing strong doubts over the ability of battling Republicans and Democrats to agree a credible plan on cutting the fiscal deficit, S&P gave the country until 2013 to act or face losing its coveted rating.

"Because the US has, relative to its `AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.

The announcement's impact on the market was "like a gas explosion in a mine," Meeschaert Capital Markets analyst Gregori Volokhine said, coming as market confidence plunged in Europe over Greece's ability to service its own massive debts.

US bond prices fell sharply after the S&P news, sending yields, the cost the United States pays for borrowing, higher.

But by 8pm GMT prices had recovered: the 10-year Treasury was yielding 3.37 per cent from 3.41 per cent late Friday, and the 30-year bond was at 4.45 per cent from 4.47 per cent on Friday.

The government rejected S&P's finding, saying the agency underestimated the political leadership's ability to tackle the problem.

Sovereign debt worries also weighed on markets in Europe as top-level negotiations began on a bailout for Portugal, the third eurozone rescue after Greece and Ireland.

European Union and International Monetary Fund officials began tough talks with Portugal in Lisbon today on the terms and conditions of a bailout.



News of another Chinese interest rate rise over the weekend as Beijing seeks to rein in its booming economy added to the negative tone of US news, dampening sentiment in the miners and others supplying China's key raw materials.



In London, the FTSE 100 index of leading shares closed down 2.10 per cent at 5,870.08 points. In Paris, the CAC 40 lost 2.35 per cent to 3,881.24 points and in Frankfurt the DAX fell 2.11 per cent to 7,026.85 points.



There were similar losses for other European markets, additionally hit by concerns Greece may have to restructure its debt and as Portugal negotiated what is expected to be very tough bailout package with the EU and IMF.



In London, Joshua Raymond, analyst at City Index traders, said European sovereign debt concerns caused "investors to trade cautiously and reduce holdings in riskier equity sectors such as miners and heavyweight banks.



"Sovereign debt concerns within Europe ... have taken centre stage over the last few days,'' Raymond said, noting how the issue could be complicated by the sharp election gains in Finland for the anti-Euro party, the True Finns.



Finland's parliament has to approve any involvement in an EU bailout package and the True Finns have made clear they flatly oppose any such payments.



Among the British banks, Barclays lost 3.63 per cent and Lloyds Banking Group 2.13 per cent and European lenders were also in the firing line.



In Paris, Guillaume Garabedian at Meeschaert Gestion Privee said trade was marked by a slew of bad news on the debt front.



Another analyst, who asked not to be named, said "there is a risk that American leaders cannot reach an understanding to reduce the deficit.



"The debt crisis is not only in the eurozone but in all the Western countries. Standard & Poor's are there to remind us of that and that is terrifying,'' the analyst said.



Dealers noted that otherwise solid US company results made little impact given the consternation caused by S&P's action.







Originally published as US shares plunge after debt warning