Stocks retreat after Merkel, Sarkozy disappoint (ext.)

NEW YORK (CNNMoney) -- U.S. stocks fell Tuesday after German and French leaders spoke about Europe's debt problems, but offered little in the way of action.

The pullback -- which briefly sent the Dow down nearly 190 points on Tuesday afternoon -- came after three straight sessions of healthy gains.

At the market close, the Dow Jones industrial average (INDU) was down 77 points, or 0.7%. The S&P 500 (SPX) lost 12 points, or 1%, and the Nasdaq composite (COMP) dropped 32 points, or 1.2%.

Investors were particularly disappointed that Sarkozy and Merkel said the size of the 440 billion euro stability fund is sufficient, despite economists' push to greatly expand the bailout fund. Some are even calling for funding of more than 1 trillion euro.

The leaders also agreed that issuing eurobonds, a collective bond to help pay off the debt of the peripheral countries, will not solve the European debt crisis.

"The market was pinning its hopes for possible solutions on the outcome of a meeting today between French and German government leaders," said Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors. "The outcome of the meeting was clearly not what the markets wanted."

Before trimming earlier losses to trade flat ahead of the European leaders' press conference, U.S. stocks were under pressure as nearly stagnant economic growth in Europe stoked fears of a regional and global slowdown.

Housing starts fell 1.5% in July to an annual rate of 604,000, while permits to build new homes slumped 3.2%. Both reports came in worse than expected.
"The focus is back on Europe and its debt problems," said Dave Hinnenkamp, CEO at KDV Wealth Management. "The eurozone economy has some problems, which is an important concern for the global economy."

Lackluster economic growth in Germany, Europe's largest economy, weighed on the broader region's economy. Gross domestic product for the eurozone, which is made up of the 17 nations that use the euro, grew by a tepid 0.2% from the prior quarter -- and by 1.7% on an annual basis.

The quarterly pace of economic growth was the slowest since the end of the recession. The decline in output intensifies concerns about the future viability of the 12-year old currency union.

The long-running debt crises in Greece, Portugal and Ireland accelerated in the second quarter, and investors are also worried that Europe's larger economies -- including Spain and Italy -- may need to be bailed out.

"The data confirm that the region's core economies are in no position to support the periphery, adding to the already significant risk of an eventual eurozone break-up," said Jennifer McKeown, senior European economist at Capital Economics, in a note to clients.

With the focus on Europe, investors largely shrugged off Fitch Ratings' affirmation of the AAA credit rating and "stable" outlook for the U.S.

Earlier this month, Standard and Poor's downgraded the nation's credit rating to AA+. And while Moody's maintained the sterling AAA credit rating, the agency lowered its outlook on U.S. debt to "negative."

The dollar was higher against the euro, but lost ground versus the British pound and the Japanese yen.

Oil for September delivery slipped $1.23 to $86.65 a barrel.

Gold futures for December delivery rose $27 to $1,785 an ounce.