* U.S. and German financial regulation hurts risk appetite
* Euro plummets to four-year lows versuss dollar
* Wall St stocks down about 1 pct, led by banks
* U.S. bonds rally on flight to safety
By Manuela Badawy
NEW YORK, May 18 (Reuters) - The euro fell to a four-year lows on Tuesday and U.S. stocks sank more than 1 percent on worries that tighter financial regulation stretching from Wall Street to Frankfurt will hinder a global economic recovery.
The price of crude oil fell to a seven-month low, hurt by the stronger U.S. dollar and as investors' aversion to risk increased on rising fears that a new chapter could unfold in the European debt crisis. U.S. Treasury prices rose on the flight to safety.
Germany, in an attack on the financial speculation on which it blames much of the euro zone's debt crisis, announced a ban beginning at midnight on naked short-selling in shares of the country's 10 most important financial institutions, as well as in some euro zone government debt and trading in credit default swaps on that debt. See [ID:nN18512882].
The euro fell to to $1.2161
"This announcement by the German government has given the view to the market that perhaps there's another problem in Europe," said John Brady, a senior vice president at MF Global in Chicago.
Brady noted that Greece's debt problems had been exposed only after a new government took office. "Now with Germany doing this, there's a belief that there may be another problem in Europe that has yet to be uncovered."
U.S. stocks were also pressured by proposed new rules from the U.S. Securities and Exchange Commission and financial exchanges to curb trading when markets plunge. The proposal follows the roughly 700-point drop in the Dow industrials in a matter of minutes on May 6. For details see [ID:nN18223624]
The Dow Jones industrial average <.DJI> fell 113.59 points, or 1.07 percent, at 10,512.24. The Standard & Poor's 500 Index <.SPX> closed down 16.07 points, or 1.41 percent, at 1,120.87, while the Nasdaq Composite Index <.IXIC> dropped 36.80 points, or 1.56 percent, at 2,317.43.
Financial stocks led the way down, with the S&P financial
index <.GSPF> falling 2.8 percent. JPMorgan Chase & Co
Shares of technology companies, which tend to rely heavily
on overseas sales, were also among the biggest losers. An index
of semiconductor shares <.SOXX> lost 2.9 percent, while Intel
Corp
Germany said the ban on some naked short selling will run through March 31, 2011. In naked short selling, a trader sells a financial instrument short, betting that its price will fall, without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sale.
"Germany decided it was going to ban naked short selling. So if you want to express your view but can't sell European equities or bonds, your only choice is to sell the currency and take your money elsewhere," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
The euro
Against the Japanese yen, the dollar
"The announcement in Germany was aimed at limiting intra-day market volatility but saw the euro extending its declines," said Vassili Serebriakov, at Wells Fargo in New York. "The proof is always in the markets."
The German ban came on the same day as European Union finance ministers voted through the draft text on tighter regulation of hedge funds and private equity firms.
The benchmark 10-year U.S. Treasury note
Crude oil
The Reuters/Jefferies CRB Index <.CRB> rose 1.73 points, or 0.68 percent, at 254.93.
Ahead of the news from Germany, the FTSEurofirst 300 <.FTEU3> index of top European shares closed up 1.3 percent at 1,026.64 points. The gains snapped two consecutive days of declines, and came after Greece received funds from the European Union to repay its immediate debt. Banks rebounded and were among the best performers after a flat performance on Monday. (Additional reporting by Vivianne Rodrigues and Emily Flitter; Editing by Leslie Adler)