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Stocks Tumble, VIX Pops as Eurozone Anxieties Intensify

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NEW YORK ( TheStreet) -- Major U.S. stock averages each fell more than 1% Monday and the VIX fear gauged spiked as investors feared that the latest updates from Italy's elections were portending the risk that the country could backpedal from its austerity programs.

The latest projections out of Italy indicated that the center-right coalition led by former Italian Prime Minister Silvio Berlusconi was coming out ahead in the senate races. Earlier, Sky News published a headline saying that an exit poll of Italian voters indicated a return of a Pier Luigi Bersani-Mario Monti coalition, which would probably have been the most market-friendly outcome, said Andrew Wilkinson, chief economic strategist at Miller Tabak .

"Needless to say, confirmation that Italy is set for a period of political deadlock could prompt a further sell-off and perhaps a renewed period of instability for the eurozone," Capital Economics cautioned in a note.

The Dow Jones Industrial Average gave up 216.40 points, or 1.55%, to close at 13,784.

Breadth was very negative, with losers outnumbering winners 27 to three. The biggest laggards included JPMorgan (JPM) , United Technologies (UTX) , Travelers (TRV) and UnitedHealth (UNH) .

Advancers included McDonald's (MCD) , Verizon (VZ) and Wal-Mart (WMT) .

The S&P 500 fell 27.75 points, or 1.83%, to settle at 1,487. The Nasdaq closed lower by 45.57 points, or 1.44%, at 3,116.

All sectors in the broader market fell, led lower by conglomerates, capital goods, financials, energy and consumer cyclicals.

Volumes swelled to more than 3.89 billion shares on the New York Stock Exchange and nearly 2 billion shares on the Nasdaq. Decliners overshadowed advancers by a ratio of 3.5-to-1 on the Big Board and 4.4-to-1 on the Nasdaq.

The VIX, which measures market volatility through options activity in the S&P 500, jumped more than 34% to 18.99.

Investors were also watching U.S. budget talks closely. Congress reconvenes in Washington this week, and a deal to avert a raft of automatic spending cuts set to kick in March 1 is looking increasingly unlikely.

Drew Matus, senior U.S. economist at UBS (UBS) , said that the across-the-board federal sequestration budget cuts are likely to pose less of an economic threat than suggested by some politicians and media accounts.

Matus said that actual spending cuts in fiscal 2013 will be around only half the slated $85 billion reduction in the budget authority.

"Moreover, some of the more dramatic associated job cut forecasts apparently ignore expected furloughs that should 'spread the pain' via a lower workweek versus outright government job cuts," Matus said. "Also, the defense industry has already has been bracing for lower defense spending. Meanwhile, there may be an only muted response by an American public becoming accustomed to budgetary 'false alarms' from Washington."

House Speaker John Boehner was expected to talk about sequestration at a press conference after the closing bell Monday.