Stocks were falling sharply Wednesday amid deepening fears about Spain’s shaky financial condition. A worse-than-expected read on a U.S. pending home sales index was also contributing to the selloff, which was wiping out Tuesday’s gains.

Oil was dropping with the crude price below $90, and demand for bonds was soaring, sending the yield on the 10-year Treasury to a new record low.

The Dow Jones Industrial Average was down by 142 points, or 1.1%, at 12,439. The blue-chip index ran as low as 12,415 earlier in the session.

The S&P 500 was losing 17 points, or 1.2%, at 1315. The Nasdaq was falling by 33 points, or 1.1%, at 2,838.

All 30 Dow components were in the red, led by Alcoa (AA), Caterpillar (CAT), and Chevron (CVX).

In the broad market, the energy, consumer cyclicals and capital goods sectors were being hit hardest.

“The market is saying the world’s riskier place than it was yesterday,” said Brian Gendreau, market strategist at Cetera Financial Group.

“The market is going to focus on Europe; that’s the elephant in the room. It really affected the U.S. market last summer and it’s back in play again.”

July oil futures were off $3.00 to $87.76 a barrel and August gold futures were slipping $6.10 to $1,548.70 an ounce.

Meanwhile, the benchmark 10-year Treasury was higher by 30/32, lowering the yield to 1.647% and the greenback rising 0.4%, according to the dollar index.

The euro was trading near a two-year low and the 10-year Spanish bond yield was hitting its highest level since the country joined the eurozone at 6.67% amid reports said that the European Central Bank has rejected plans to recapitalize Spanish bank Bankia by tapping into the central bank’s funds, leaving investors worried about how Spain will rescue its beleaguered banks, as well as the potential for bank runs by Spanish citizens if panic sets in.

The ECB has issued a statement denying these reports with some headlines saying that the European Union is now willing to consider bank recapitalizations through the soon to be created European Stability Mechanism, the eurozone’s permanent bailout fund. The European Union has called for the formation of a banking union by the 17 countries comprising the eurozone in order to provide central oversight for the banking system.

“The denial is not stopping investors from reacting negatively,” said Dan Greenhaus, a chief global strategist at BTIG.

Eurozone debt crisis fears were also highlighted at Italy’s bond auction, where the country sold 5.73 billion euros of 10-year and five-year bonds, below its maximum 6.25 billion euro target, at elevated rates of 6.03% for the 10-year and 5.66% for the five-year.

Worries were also inflamed after a Greek opinion poll showed that most citizens hoped to see the austerity measures in Greece’s international bailout deal relaxed.

Hong Kong’s Hang Seng Index settled down 1.9% and the Japan’s Nikkei Average closed down 0.3% after China’s official news agency said the Chinese government does not plan to carry out another round of large scale stimulus.

Societe Generale said that while Chinese policymakers will not commit themselves to a predefined sizable investment stimulus plan like in late 2008, “infrastructure investment will be the de facto key policy tool in the next few months, which supports our forecast for a rebound in growth in [the second half].”

The firm explained previously that interest rate cuts may not help as the country has been showing symptoms common in other economies at the low point of a traditional business cycle in recent months.

In U.S. economic news, the National Association of Realtors reported that the April U.S. pending home sales index fell 5.5% to 95.5, the lowest level since December, from a downwardly revised 101.1 in March. Still, the index for April is elevated from the same time last year, when it sat at 83.5. Economists surveyed byBriefing.com expected pending home sales to rise 2%.

In corporate news, Research In Motion (RIMM) late Tuesday forecast an operating loss for its fiscal first quarter. The BlackBerry maker added that it expects its “financial performance will continue to be challenging for the next few quarters.” RIM also said it has hired bankers to help with its review of its strategic options and that it planned to make “significant” reductions in its work force. The stock was down more than 8%.

Shares of Facebook (FB), the social networking giant, were edging lower on Wednesday. The stock, which is fast becoming a favorite of short sellers, lost nearly 10% of its market capitalization on Tuesday amid reports that it’s was possibly planning to make a run at acquiring Norway’s Opera Software. At Wednesday’s low of $28.25, the shares were down nearly 26% from the IPO pricing of $38 each.

Pep Boys (PBY) shares dropped more than 28% after the Philadelphia-based auto parts and services company agreed to terminated its merger deal with buyout firm Gores Group, which is paying Pep Boys $50 million in fees as reimbursement for merger-related costs.

Shares of Teavana Holdings (TEA) were among the biggest percentage decliners after the Atlanta-based specialty retailer reported an in-line profit for its fiscal first quarter but came up short on the top line. Sales rose 27% year-over-year to $44.3 million in the April-ended period, slightly below the average estimate of analysts polled by Thomson Reuters for sales of $45.1 million.

For its second quarter ending in July, Teavana forecast adjusted earnings of 2 to 3 cents a share on sales of $38 million to $40 million vs. the current consensus view for a profit of 3 cents a share on sales of $41.5 million. The stock was down more than 18% in late morning action.

Sallie Mae (SLM) was getting a lift after the student financing company added another $400 million to its share repurchase program. The stock was up more than 2%.

The Street