Stocks fall after euro bond sale rejection

US stocks fell, following the biggest three-day rally since 2009, as German and French leaders proposed a financial-transaction tax and rejected selling euro bonds to halt a debt crisis threatening economic growth.

NYSE Euronext and Nasdaq Inc, two of the biggest exchange operators in Europe, dropped at least 2.7%. Caterpillar Inc., Deere & Co and 3M Co declined at least 1.4%, pacing losses in companies most tied to the economy, as Europe’s economic growth trailed estimates and US housing starts slumped. Citigroup Inc and Bank of America Corp slipped more than 4.2% after billionaire John Paulson’s hedge fund said it reduced positions in both lenders.

The S&P 500 fell 1% to $1,192.74 at 4pm in New York. The benchmark gauge advanced 2.2% yesterday, erasing last week’s drop. The Dow Jones Industrial Average slid 76.89 points, or 0.7%, to $11,406.01.

“Europe will continue to be an overhang until they come up with realistic policies,” Peter Jankovskis, who helps manage about $2.6 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “We’ve already got disappointing economic numbers out of Europe earlier today. Then, you have a programme which is not really doing anything to address that.”

The S&P 500 fell 12% from April 29 through yesterday on concern about an economic slowdown and Europe’s widening debt crisis. Gauges of S&P 500 companies least tied to economic growth, including utilities and sellers of consumer staples, fell less than the index during the slump, losing 1.4% and 4.6% respectively. The index rallied 7.5% over the previous three days amid a decline in jobless claims, an increase in retail sales and corporate takeovers.

Earlier losses in stocks yesterday followed a report showing European economic growth slowed more than forecast in the second quarter as Germany’s recovery almost ground to a halt amid the worsening debt crisis.

Gross domestic product in the 17-nation euro area rose 0.2% from the first quarter, the worst performance since the euro region emerged from recession in late 2009. Economists had forecast growth of 0.3%, according to the median of estimates in a Bloomberg News survey.

German Chancellor Angela Merkel and French President Nicolas Sarkozy proposed debt limits be written into national law and establishing a “euro council” to be headed by European Union President Herman van Rompuy as part of a planned “economic government” for Europe.