Share prices recovered from steep, early-morning losses on fears that Spain might need a bailout to close with moderate declines on North American markets.
Stocks dropped sharply at the beginning of the session, driven lower by jitters over Europe's worsening debt crisis. Spanish 10-year bond yields streaked to 7.5 per cent, another euro era high and a sign of extreme investor skittishness over the country's prospects.
But a decision by market regulators in both Spain and Italy to curb short sellers helped shares move off their lows.
Spanish stocks were on track to post a second panic-stricken day of losses of more than 5 per cent , but rallied after the announcement of a three month prohibition on all short selling to close off only 1.1 per cent. Italian regulators also issued a one–week ban on short selling.
The S&P TSX fell 77 points or .67 per cent to close at 11,546.
Toronto stocks fared relatively well by international standards, boosted by a surprise Chinese bid for Nexen Inc., which surged 53 per cent in active trading.
The proposed takeover, made at a huge premium, provided a bid for other energy producers with natural gas giant Encana Corp. rallying 4.1 per cent and Talisman Energy Inc. up 6.7 per cent.
But worries over Europe hit financial stocks, with all six major banks and the country's three largest life insurance companies posting negative performances.
Sun Life Financial Inc. and Great-West Lifeco Inc. led the insurers lower with losses of 5 per cent and 3.9 per cent respectively, while Royal Bank of Canada paced the banks with a 1.7 per cent drop, followed by the National Bank of Canada with a 1.6 per cent decline.
In the U.S., the Dow Jones industrial average recovered from an early swoon of more than 200 points to close off 101 points, or .79 per cent, to 12,721.
French, German and British stocks all closed sharply in the red, with losses of two to three per cent.
Given the worries about the health of the European economy, commodity prices weakened across the board. Crude oil plunged $3.47 (U.S.) to $88.37 a barrel in late afternoon trading while gold was changing hands at $1,577 an ounce, off $7.
One prominent forecasting firm said on Monday that it has taken a decidedly negative view on the U.S. market. TrimTabs Investment Research is betting that further declines lie ahead.
"Growth in the U.S. economy has slowed to just about zero," said Charles Biderman, TrimTabs' chief executive officer.
"Most of the indicators that we watch closely point to stock prices falling in the weeks ahead."
Mr. Biderman issued a note to clients Monday advising that the firm had moved to a 100 per cent short position, saying it had turned "fully bearish" from a previous "cautiously bearish" position of being 50 per cent short.
In a short trade, an investor sells a stock borrowed from broker in the hope of purchasing it later at a lower price, pocketing the difference as profit.
TrimTabs tracks supply and demand for U.S. stocks, an indicator that it believes shows whether there is fresh buying power to drive share values higher. But share buybacks have been averaging only $400-million a day for the past two weeks, far below the new stock issuance of $850-million a day.
As well, the firm says the U.S. economy is weakening, which means companies will be unlikely to shell out more cash to support stock prices through buy backs.
Meanwhile, labour markets are weakening and after several rounds of unconventional monetary policy, the Federal Reserve Board is running out of fresh ammunition to stimulate the economy.
"There is almost nothing the Fed can do now to boost the economy," Mr. Biderman said in his note.
"Creditworthy borrowers can already borrow on extraordinarily favourable terms, dictated interest rates are near zero, and borrowing costs are extremely low across the board. "