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By Aleksandra Michalska

NEW YORK (Reuters) – Stocks fell more than 1 percent on Monday as concerns the United States and Europe were not coming to grips with their debt problems battered bank shares.

U.S. lawmakers scrambled to avoid a government debt default as the Treasury approached the statutory $14.3 trillion limit on borrowing, while the euro zone’s regulatory stress tests for banks were viewed as unrealistic, given the region’s fiscal crisis.

Bank of America Corp (NYSE:BAC – News) fell 4 percent to $9.61 and was the biggest percentage loser in the S&P 500 index. U.S.-listed shares of Barclays Plc (LSE:BARC.L – News; NYSE:BCS –News) dropped 8 percent to $13.35. Both hit 52-week lows.

“The decline is playing off of the uncertain economic environment and the constraints those banks have been placed under,” said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston. Peruzzi added that even if Bank of America reports strong results on Tuesday, he didn’t expect its stock to rise.

The Dow Jones industrial average (DJI:^DJI – News) was down 147.74 points, or 1.18 percent, at 12,331.99. The Standard & Poor’s 500 Index (^SPX – News) was down 16.40 points, or 1.25 percent, at 1,299.74. The Nasdaq Composite Index (Nasdaq:^IXIC –News) was down 38.36 points, or 1.38 percent, at 2,751.44.

With five days remaining before U.S. President Barack Obama’s deadline for a deal, Republicans and Democrats rushed to complete a fallback plan that would avoid a U.S. default.

The longer the debt ceiling debate remains unresolved, the bigger the risk for further declines in stocks and a spike in volatility. The CBOE Volatility index (Chicago Options:^VIX – News) was up 11.6 percent on Monday and last week rose nearly 30 percent.

“The debt ceiling has been the driver for the U.S. market for a month now, and it is going to be the driver for at least a month ahead.” said Tom Alexander, head of Alexander Trading in Savannah, Georgia. “Earnings and Europe are on the back burner. That’s minor compared to this situation in Congress.”

Expectations of strong earnings could fuel optimism, but it may not be enough. Last week’s encouraging results from Google Inc (NasdaqGS:GOOG – News) and JPMorgan Chase & Co (NYSE:JPM – News) were overshadowed by global economic worries that sparked the S&P 500’s worst performance in five weeks.

In the latest earnings news, Halliburton Co (NYSE:HAL – News) reported a 54 percent jump in quarterly profit as a U.S. onshore drilling boom showed no sign of cooling off. Still, the stock fell 0.4 percent to $52.83.

Second-quarter earnings for S&P 500 companies are seen rising 6.5 percent, and of the 39 companies in the S&P reporting so far, 74 percent posted higher-than-expected profits, according to Thomson Reuters Proprietary Research.

“It remains to be seen whether earnings will be enough to trump the debt issues,” said Paul Nolte, managing director at Dearborn Partners in Chicago. “Based on last week’s trading action, maybe not.”

News Corp (NasdaqGS:NWSA – News) fell nearly 5 percent to $14.89. In the widening phone hacking scandal, Rebekah Brooks, the former head of company’s UK newspaper business, was arrested and the head of Scotland Yard resigned. The company also set up an independent committee to oversee new ethics procedures.