By Steve Goldstein, MarketWatch
NEW YORK (MarketWatch) -- It's time to break out the Dow 10,000 banners again.
A combination of Korean tensions, Spanish bank health worries and inter-bank lending woes slammed U.S. stock futures on Tuesday as markets looked for set for a second day of heavy losses.
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Futures on the Dow Jones Industrial Average dropped 205 points to 9,838.00, indicating the blue chips are likely to drop under 10,000 at the start, which would be its first move under that psychological level since mid-February, and putting the index at risk of closing below the 10,000 mark for the first time since Feb. 8.
S&P 500 futures fell 25.5 points to 1,045.5 and Nasdaq 100 futures dropped 37.5 points to 1,775.00.
The key number to watch is the 1,044.50 February low on the S&P 500 contract, according to Marc Pado of Cantor Fitzgerald. "When one number becomes so obvious, like a moth to a flame, it seems as though the markets move to challenge those levels," he said.
U.S. stocks dropped sharply Monday -- and worryingly for technicians, closed around the lows of the day -- after Spain seized a regional lender and a critical report from the International Monetary Fund on Spain's finances was unveiled. The Dow Jones Industrial Average fell 127 points, or 1.2%, much of it coming in the late going, and other leading indexes also fell.
The three-month dollar LIBOR inter-bank lending rate hit 0.5% for the first time since July in a sign of the stresses in markets -- though it's still well below the 4.82% reached at the peak of the credit crunch in October 2008.
Overnight, Korean stocks and the won tumbled after a group said Kim Jong-il ordered the North Korean military to be ready for combat. The Nikkei 225 Average dropped 3.1% in Tokyo as the Kospi lost 2.75% in Seoul.
Yields on 10-year U.S. Treasury notes fell 9 basis points to 3.115%, indicating strong demand for safe-haven government debt.
Seemingly every other asset dropped, with copper futures falling more than 3% and oil futures sliding more than $2 a barrel. The euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.2278, -0.0064, -0.5186%) was slammed another 1.1%, falling to $1.2212.
"The encouraging part of the newsflow is that, under extreme pressure, it seems that European governments have started to address their problems," said Philip Gisdakis, a strategist at UniCredit, pointing to budget cuts in Greece, Portugal and Spain, reform in the Spanish banking sector, and discussion about structural reform in the euro zone.
"The bad news for investors is that due to the reforms, markets will turn more negative before they will improve. Harsh austerity measures and a reform of the banking system in the midst of a deflating property bubble are definitely not supporting growth."
Later Tuesday, the U.S. Treasury is selling $42 billion in five-year notes, and on the data front, the S&P/Case-Shiller home price index for March is due at 9 a.m. Eastern. At 10 a.m., the Conference Board consumer confidence gauge for May as well as the FHFA house price gauge for March also are due for release.
"Though leading indicators still point to a steady expansion this summer, fears are growing that a collapse in confidence could undo the positive growth impulses that are still present today, with tensions in money markets resulting in dollar liquidity drying up," said Kenneth Broux, senior market economist at Lloyds TSB Corporate Markets.
Companies trading actively ahead of the opening bell included Dynegy /quotes/comstock/13*!dyn/quotes/nls/dyn (DYN 4.74, -0.31, -6.14%) , which fell 9%, and Allied Irish Banks /quotes/comstock/13*!aib/quotes/nls/aib (AIB 2.25, -0.26, -10.40%) , which slumped 11%. Irish, Portuguese and Italian markets joined Spain and Greece in bear market territory Tuesday.
Steve Goldstein is MarketWatch's London bureau chief.