(Reuters) - Wall Street stocks sank on Monday as fears about Europe's debt crisis and the global economy sent a shudder through markets and overshadowed the start of the U.S. earnings season.

Renewed concerns that Europe's debt crisis would spread, an increase in Chinese inflation and an impasse in budget talks in Washington converged to jolt investors. The news came after Friday's abysmal U.S. jobs report shocked markets.

U.S. exchange traded funds tracking European equity markets came under heavy selling pressure. The IShares MSCI Italy Index Fund (EWI.P), a fund that tracks Italian stocks, fell 4.9 percent to $15.63.

"In the short term, in terms of worries -- not actual events but worries --it's a little bit of a perfect storm for investors," said Oliver Pursche, president at Gary Goldberg Financial Services in Suffern, New York.

Banks and other economically sensitive stocks fell. Bank of America Corp (BAC.N) lost 2.3 percent to $10.46, while Freeport McMoran Copper & Gold Inc (FCX.N) fell 2.7 percent to $53.64.

The Dow Jones industrial average .DJI dropped 114.13 points, or 0.90 percent, to 12,543.07. The Standard & Poor's 500 Index .SPX fell 14.88 points, or 1.11 percent, to 1,328.92. The Nasdaq Composite Index .IXIClost 29.04 points, or 1.02 percent, to 2,830.77.

Global equity markets fell, the euro slid more than 1 percent and the cost of insuring Italian debt jumped to a record amid fears of contagion in Europe's debt markets and reports some European Union leaders were considering allowing a selective default by Greece.

Alcoa Inc (AA.N) is set to kick off the second-quarter earnings season after the close. Shares in Alcoa, the largest U.S. aluminum producer, fell 2 percent to $16.05.

(Reporting by Edward Krudy; Editing by Kenneth Barry)

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