The Toronto stock market was deep in the red Wednesday as commodity prices retreated amid worries that Italy's borrowing costs are becoming too large to handle and the effect Europe's chronic debt woes could have on the global economy.

The S&P/TSX composite index fell 130.76 points to 12,358.1, off early lows thanks to strong gains in gold stocks, while the TSX Venture Exchange fell 23.04 points to 1,646.63.

The Canadian dollar was sharply lower as traders sold off risk and bought up safety in the form of U.S. Treasury bonds. The loonie fell 1.04 cents to 98.15 cents US.

U.S. markets tumbled as the Dow Jones industrials slid 218.23 points to 11,951.95, the Nasdaq composite index dropped 58.05 points to 2,669.44 while the S&P 500 index fell 25.79 points to 1,250.13.

Markets had responded enthusiastically Tuesday after premier Silvio Berlusconi lost a confidence vote and his majority in parliament and said he would resign after his government's new austerity budget is passed. But pessimism returned with a vengeance as the country's 10-year bond yield jumped above the seven per cent level amid uncertainty about who will steer the country through its debt crisis.

“All it does is add more uncertainty,” said Chris Kuflik, investment adviser at ScotiaMcLeod in Montreal.

“The bottom line is, if you need to negotiate with someone, who do you negotiate with?”

The yield on Italy's 10-year bonds surged Wednesday to a high of 7.41 per cent, up 0.83 of a percentage point from the previous day. Bond yields in the seven per cent range are considered to be unsustainable in the long run. When Greece, Ireland and Portugal saw their 10-year borrowing rates rise above seven per cent, the markets concluded they had to be bailed out.

Higher rates would make it more difficult and expensive for Italy to roll over its debts.

“The biggest problem is those bond markets,” added Kuflik. “What we're seeing now is the fear that this whole thing is going to become unravelled.”

Italian president Giorgio Napolitano sought to reassure markets, saying speculation about whether Berlusconi would actually leave office are completely unfounded. He said economic reforms demanded by the European Union would be passed by parliament “in a matter of days.”

The eurozone's debt crisis threatens the region's banks, its currency and there are worries it could derail an already fragile economic recovery.

Slowing economic conditions would erode demand for oil and metals, which in turn pressures share prices of oil and mining companies on the TSX.

Commodity prices headed lower Wednesday with the December crude contact on the New York Mercantile Exchange down 30 cents to $96.50 (U.S.) a barrel. The TSX energy sector lost 1.77 per cent while Suncor Energy shed 99 cents to $32.30 and Cenovus Energy lost 54 cents to $34.21.

Metals also fell back as the December copper contract in New York lost nine cents to US$3.44 a pound.

The mining sector fell 4.45 per cent as Teck Resources dropped 98 cents to $39.27 and First Quantum Minerals retreated $2.34 to $20.65.

Railroad stocks fell alongside resource companies as Canadian National Railways gave back $1.01 to $79.61.

Worries about the European banking system pushed the TSX financial sector down 1.5 per cent and Royal Bank declined 95 cents to $45.47.

The gold sector was the only advancer, up 1.15 per cent as the December gold contract in New York was off $5 to $1,794.20 an ounce. Barrick Gold Corp. gained 72 cents to $53.22.

European markets also chalked up big losses as London's FTSE 100 index lost 2.29 per cent, Frankfurt's DAX fell 2.51 per cent and the Paris CAC 40 was down 2.33 per cent.

Earlier in Asia, sentiment had been boosted by the Berlusconi pledge to resign, with Japan's Nikkei 225 index closing 1.2 per cent higher, South Korea's Kospi added 0.2 per cent and Hong Kong's Hang Seng jumped 1.7 per cent.

There was also some cheer from the news that China's stubbornly-high inflation fell in October as rapid rises in food costs eased. The decline was seen positively by investors as it gives Beijing more room to stimulate China's economy.

Mainland China's Shanghai Composite Index gained 0.8 per cent and the smaller Shenzhen Composite Index rose 1.6 per cent.

There were also earnings reports from a variety of sectors to digest.

General Motors Co.’s third-quarter profit fell 15 per cent to $1.7 billion (U.S.) from a year earlier as the company posted a loss in Europe. Still, it was the GM's seventh-straight quarterly profit, and the lower numbers still beat expectations. Revenue rose 7.6 per cent to $36.7 billion and GM shares fell $1.93 to $23.11 in New York.

Shares in home improvement retailer Rona Inc. gave back 21 cents to $9.35 as it reported net income of $50.1 million in its third quarter, up from $48 million in the same quarter last year. Revenues were $1.3 billion, up $27.9 million.

Enbridge Inc., a major oil pipeline operator and natural gas distributor, says quarterly profits were down to $4 million, or a penny per share, from $157 million or 21 cents per share a year earlier as it booked derivatives losses. Adjusted earnings, which filter out the mark-to-market values, increased to $241 million from $195 million and its shares were down 10 cents to $35.25.

Silvercorp Metals Inc., a Vancouver-based company which operates mines in China, has raised its quarterly dividend by 25 per cent to 2.5 cents. The move comes a day after the miner reported its latest quarterly profits jumped sharply on a 71 per cent increase in revenues. Its shares were up four cents at $9.66.

Wi-LAN Inc., which primarily collects licensing fees from companies that use technologies covered by its portfolio of patents, reported that its quarterly rose to $7.3 million as it strengthened its revenues. The results were equal to six cents per share, compared to a loss of $6 million, or six cents per share a year earlier. Its shares were down 58 cents to $6.81.

Quebecor Inc. shares slipped 41 cents to $33.25 as it said its net income in the third quarter amounted to $26.1 million, or 41 cents per basic share. That was down from $56.9 million, or 88 cents per share, in the third quarter of 2010. Revenue during the quarter, however, was up $44.9 million to $1.01 billion, compared to $969.9 million in the same quarter last year.