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The euro nursed heavy losses early in Asia while the yen gained across the board as worries about sovereign debt problems in Europe and the United States prompted investors to unwind carry trades.

Spot gold prices firmed below their record high, as the S&P move and other developments further stoked investors' interest in bullion.

The S&P cut in outlook on United States debt jacks up pressure on the Obama administration and Congress to slash the yawning federal budget deficit.

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could eventually cut its long-term AAA rating on the United States within two years.

Japan's benchmark Nikkei average .N225 was down 1.2 percent, or 113.89 points at 9,442.76, while the broader Topix .TOPX shed 1.0 percent to 827.88.

The euro fell to as low as 116.41 yen -- the lowest since March 30. The dollar also underperformed the yen, falling to a near three-week low around 82.16, before recovering slightly to last stand at 82.59.

Spot gold gained 0.8 percent to $1,493.29 an ounce by 8:19 p.m. EDT, below the record high of $1,497.20 hit in the previous session.

NYMEX crude for May delivery, which expires on Tuesday, was down 6 cents at $107.06 a barrel by 8:35 p.m. EDT, after settling down $2.54 at $107.12 a day earlier.

Brent crude for June fell 1 cent to $121.60 a barrel versus a $121.61 settlement in the previous session.

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, slapped a negative outlook on the country's top-notch credit rating and said there's an at least a one-in-three chance that it could eventually cut the country's long-term AAA rating.

A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.

If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. That would threaten to hurt the economy as it recovers from the worst recession since World War II.

"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets and has a short position on U.S. government debt.

Major U.S. stock indexes shed more than 1 percent after the announcement. Longer-dated government bond prices initially fell but recovered in afternoon trade and the dollar rose.

More immediate fiscal problems in Greece, traders said, hurt the euro and supported some U.S. assets.

The cost of insuring Treasury debt against default at one point on Monday neared a 2011 high, though it was well below lofty levels hit two years ago when fears of a double-dip U.S. recession raged.

BUDGET BATTLE

The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.5 trillion budget deficit and $14.27 trillion debt burden.

The White House last week announced plans to trim $4 trillion from the deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich. Congressional Republicans want deeper spending cuts and no tax increases.

The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.

A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.

Even so, Austan Goolsbee, the top economist at the White House, downplayed S&P's move, telling CNBC on Monday it was a "political judgment" that "we don't agree with."

Investors also focused on Greece, where financial markets are increasingly convinced the country will have to renegotiate the terms of its public debt. Greek officials denied that some form of debt rescheduling was imminent.

The CBOE Volatility Index .VIX rose 11.2 percent, after earlier climbing as much as 24.5 percent, its largest daily percentage jump since February 22. It closed on Friday at its lowest since July 2007.

S&P downgraded its outlook on the United States credit rating to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

"We're a little surprised that the VIX is as low as it is, since market risks have risen and there's been some complacency," said David Joy, chief market strategist at Columbia Management in Boston, which oversees $347 billion. Joy added that Columbia Management had taken some short-term exposure off the table.

The stock market's vulnerability was demonstrated by its strong sell-off. In comparison, the reactions of the U.S. Treasury debt and dollar markets were more subdued. See and

"The behavior of the bond market suggests that we could get a rebound in stocks, at least one related to the S&P news," Joy said. "I'm not so sure we'll get a rebound related to Europe."

The Dow Jones industrial average .DJI was down 147.35 points, or 1.19 percent, at 12,194.48 The Standard & Poor's 500 Index .SPX was down 14.65 points, or 1.11 percent, at 1,305.03. The Nasdaq Composite Index .IXIC was down 32.34 points, or 1.17 percent, at 2,732.31.

In Monday's sell-off, the S&P 500 fell below 1,300 for the first time since March 24. Short-term support is seen near the 1,285 area.

On Friday, the S&P 500 fell for a second week as concern spread that growth expectations may have to be trimmed.

As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities .GSPU, consumer staples .GSPS and healthcare .GSPA posted the smallest losses in Monday's slide.

Citigroup Inc (C.N) rose 0.9 percent to $4.46 after it reported a first-quarter profit that was slightly higher than expected, while Eli Lilly & Co (LLY.N) fell 0.6 percent to $35.78 on concerns about looming generic drugs competition.

Mitch Rubin, chief investment officer at RiverPark Advisors in New York, said the day's earnings suggested volatility in the near term.

"Market movement will be driven by earnings, and we've seen a lot of mixed results," Rubin said. "There's been disappointment about bank results."

China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against excessive liquidity and stubbornly high inflation in the world's second-largest economy.

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could eventually cut its long-term AAA rating on the United States.

A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.

If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. That would threaten to hurt the economy as it recovers from the worst recession since World War II.

"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets and has a short position on U.S. government debt.

Major U.S. stock indexes shed more than 1 percent after the announcement. Longer-dated government bond prices initially fell but recovered in afternoon trade and the dollar rose.

More immediate fiscal problems in Greece, traders said, hurt the euro and supported some U.S. assets.

The cost of insuring Treasury debt against default at one point on Monday neared a 2011 high, though it was well below lofty levels hit two years ago when fears of a double-dip U.S. recession raged.

BUDGET BATTLE

The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.5 trillion budget deficit and $14.27 trillion debt burden.

The White House last week announced plans to trim $4 trillion from the deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich. Congressional Republicans want deeper spending cuts and no tax increases.

The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.

A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.

Even so, Austan Goolsbee, the top economist at the White House, downplayed S&P's move, telling CNBC on Monday it was a "political judgment" that "we don't agree with."

S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, said the move signals at least a one-in-three chance that it could cut its long-term rating on the United States within two years.

A downgrade would further undermine the status of the United States as the world's economic powerhouse. It would also push up mortgage rates and tighten credit conditions across the economy, possibly derailing a U.S. recovery from the worst recession since World War II.

"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets.

Longer-dated U.S. government bond prices fell, while major U.S. stock indexes shed more than 1 percent. But the dollar held gains against the euro.

The cost of insuring U.S. Treasury debt against default neared a 2011 high, though it remained well below lofty levels reached in March 2009 when fears of a double-dip U.S. recession flared.

The move will push the Obama administration and Congress to work harder to come up with an aggressive long-term plan to cut a nearly $1.5 trillion federal budget deficit, equal to about 9.8 percent of output.

"It's a wake up call that we need to do something," said Axel Merk, president and portfolio manager of Merk Hard Currency Fund in Palo Alto, California. S&P is "absolutely correct that this is something serious that needs to be addressed."

TROUBLE FOR TREASURIES

Outstanding public U.S. debt has swelled to more than 60 percent of total output in the aftermath of the 2007-2009 financial crisis. With a budget deficit running at nearly 10 percent of output and expected to grow, that total is expected to swell further.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said in a release.

The picture had become bleak enough to prompt PIMCO, the world's largest bond fund, to announce in February it had sold all U.S. Treasuries in its $236 billion Total Return Fund.

Bill Gross, PIMCO's chief investment officer, said he expected interest rates to climb, the dollar to fall and the United States to lose eventually its AAA credit rating.

The Obama administration last week announced plans to trim $4 trillion from the budget deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich.

A top administration official on Monday reiterated U.S. commitment to act and said S&P underestimated that resolve.