MILAN — Fears of a growing European debt crisis spread to Italy and luxury stocks in dramatic fashion Monday, dragging the Milan Bourse down 4 percent even as officials stepped in to curtail short selling.

This story first appeared in the July 12, 2011 issue of WWD. Subscribe Today.

Until recently it was Greece — which has agreed to cut back on spending to secure a bailout from its neighbors — that was drawing most of the attention as Europe’s financial troubles mounted. On Monday, that anxiety spread to Italy, where Consob, the Italian market watchdog, intervened to rein in short selling, a trading strategy that allows investors to benefit when stock prices fall.

Still smarting from Friday’s unexpectedly weak reading on job growth in the U.S., investors pushed markets down around the world, with bank stocks hit particularly hard.

As the Milan Bourse fell more than 750 points to 18,295.19, the CAC 40 dropped 2.7 percent to 3,807.51 in Paris, the DAX fell 2.3 percent to 7,230.25 in Frankfurt and the FTSE 100 declined 1.1 percent to 5,927.89 in London. On Wall Street, the S&P Retail Index declined 1.7 percent to 545.12 and the Dow Jones Industrial Average decreased 1.2 percent to 12,505.76.

European fashion executives kept a wary eye on the markets.

“We are surely [seeing] a speculation operation,” said Massimo Ferretti, executive chairman of Aeffe SpA, which produces collections for Alberta Ferretti and Moschino, among others. “It is sad to observe that the recent past has really taught us very little.”

Guido Damiani, chairman and chief executive officer of Damiani, noted the already fragile situation was worsened by the risk of default by countries such as Greece and Portugal.

“On the other hand, there are countries that have started to grow again a while back and won’t stop [growing],” Damiani said. “In regards to Italy, even if consumer spending remains weak, it has stopped decreasing. I don’t think Italy is at risk and that the short sales will end soon.”

Shares of Marcolin SpA fell 7.6 percent to 4.48 euros, or $6.38 at current exchange, as Aeffe dropped 6 percent to 1.14 euros, or $1.62; Tod’s SpA fell 5.4 percent to 88.25 euros, or $125.75; Salvatore Ferragamo SpA dropped 4.7 percent to 10.10 euros, or $14.39; Damiani decreased 3.3 percent to 1.05 euros, or $1.50, and Safilo Group fell 4.6 percent to 9.26 euros, or $13.20.

A luxury goods analyst who requested anonymity said the sector is being heavily penalized because of its high volatility. “This reaction is to be expected as this segment magnifies the movements of the market. However, these are also companies that are highly exposed outside Italy — Luxottica is one example — and for this reason should not be too affected by Italy’s penalizing trend.”

Shares of Luxottica Group fell a relatively mild 1.9 percent for the day to 21.90 euros, or $31.21.

The analyst said macroeconomic issues are the drivers behind this kind of underperformance, which is “in no way justified by fundamentals” and that Italy’s political problems could be one of the reasons investors are moving money out of the country.

In France, shares in luxury firms also slumped amid the market gloom: retail-to-luxury conglomerate PPR declined 2.4 percent to 123.55 euros, or $176.06; Hermès International fell 2.3 percent to 212 euros, or $302.10, and LVMH Moët Hennessy Louis Vuitton declined 2.2 percent to 124.15 euros, or $176.91.

Concerns about Italy’s finances come as President Obama, House Speaker John Boehner (R., Ohio) and other congressional leaders tried to hammer out an agreement to adjust the debt limit and avoid a U.S. default.

Although Paul Nolte, managing director of investment firm Dearborn Partners, shrugged off the U.S. debt talks as the usual political wrangling, he said concerns about Italy were worrisome.

“Italy is probably a factor of four- to six-times bigger than Greece,” Nolte said. “U.S. banks are more tied to Italy, as are English banks, so it has more direct impact. Greece was more of a German issue. We heard this morning from both Obama and Boehner about our own deficit issue. I think investors are getting a sense that Rome is burning and Nero is fiddling.”

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