Global stocks tumbled into the red for the year while safe-haven assets rallied on Tuesday as fear of a downgrade of the US credit rating and rising yields in Europe stoked worries of higher borrowing costs in a soft global economy.

US stocks wiped out most of their gains for 2011 on Tuesday, plunging after poor economic data overshadowed a congressional deal to raise the country's debt ceiling and avoid a default.

The Dow Jones Industrial Average was down 265.72 points (2.19 per cent) to 11,866.77 in closing trade, the broader S&P 500 dropped 32.90 points (2.56 per cent) to 1,254.04 and the tech-heavy Nasdaq Composite shed 75.37 points (2.75).

Investors, focused on slower global growth and the euro zone's spreading credit problems, opted for the relative safety of the Swiss franc, US government bonds and bullion, which hit its ninth record this year.

US President Barack Obama signed into law a measure approving a rise in the US statutory borrowing limit. Despite soothing comments on the deal from rating agency Fitch, fears that the United States could still lose its triple-A credit rating persisted.

"Today's passing of the bill has already been priced into the market as investors now look ahead to a possible downgrade for the US debt rating following the vote," said Chris Jarvis, senior analyst at Caprock Risk Management in Hampton Falls, New Hampshire.

US consumer spending dropped in June for the first time in nearly two years, adding to worries the world's largest economy would remain stagnant in the third quarter.

"The combination of the two worst storms – retreating fundamentals and the fears going around in both the United

States and Europe -- is going to put a lot of volatility in the market," said Jonathan Xiong, managing director and global investment strategist at Mellon Capital Management in San

Francisco. Xiong is part of a team that oversees $30 billion in assets.

The preference for safe-haven assets helped lift gold to a fresh high. Spot gold was at $1,646.12 an ounce, having touched an all-time high of $1,647.02 earlier in the day.

US Treasuries rallied after rating agency Fitch said the debt agreement was "commensurate with 'AAA' rating." Treasuries were up for a fourth straight day, with the benchmark 10-year note up 35/32 to yield 2.625 per cent.

On Wall Street, the broad S&P 500 index fell sharply and broke through key technical support on economic fears and worry that the debt ceiling agreement does not do enough to satisfy the top credit rating agencies. A credit downgrade could increase Treasury yields and raise borrowing costs.

"I think people are worried about a double-dip recession and the softening economic statistics," said Jeffrey Saut, Raymond James Financial chief investment strategist, in St. Petersburg, Florida.

The Dow Jones industrial average dropped 202.68 points, or 1.67 per cent, to 11,929.81. The Standard & Poor's 500 Index was down 25.96 points, or 2.02 per cent, at 1,260.98. The Nasdaq Composite Index was down 58.97 points, or 2.15 per cent, at 2,685.64.

MSCI's world equity index fell 1.7 per cent on the day to its weakest since late June and edged 0.55 per cent lower for the year.

European stocks closed 1.8 per cent lower with Italian shares down 2.5 per cent and Spain's IBEX 35 off 2.2 per cent.

The Swiss franc rose to a record high against the euro and the US dollar on concerns about euro zone sovereign debt problems and the chance of a US credit downgrade.

Italian bond yields hit their highest level in the euro's 11-year lifetime, a sign that Rome is overtaking Madrid as the main focus of investors' concern about debt sustainability.

The Italian 10-year BTP yield was up 6.159 per cent and the 10-year Spanish government bond yield rose to 6.283 per cent after hitting 6.47 per cent, its highest since 1997.

The two countries have been under increased pressure in recent weeks as markets feel the size of the euro zone's bailout fund is too small to protect larger fringe economies if contagion from the Greek crisis cannot be stopped.