Interest rates fell sharply in the bond market Thursday as new problems with European government debt brought worries that the global economy is sicker than many had believed.

Soft labor-market data in the U.S. also led investors to pare their exposure to risk by dumping stocks and parking money in Treasurys.

Bond prices rose, sending their yields lower, as the Dow Jones industrial average fell more than 260 points. Other major stock indexes fell about 3 percent.

The Labor Department reported an unexpected drop in weekly jobless claims last week, the day before a closely watched employment report for January comes out. Hopes were fading quickly that the Friday report would show a long-awaited improvement in the job market.

U.S. trading was heavily affected by European stock markets, which tumbled on concerns about how well Greece, Spain and Portugal will be able to service their mounting loads of debt. The euro also hit a seven-month low against the dollar.

The yield on the 10-year Treasury note that matures in November 2019 fell to 3.60 percent from 3.71 percent late Wednesday. Its price jumped 29/32 to 98 6/32. That yield is a widely used benchmark for consumer loans including mortgages.

Political tussling in Portugal and strikes in Greece raised doubts that leaders in those countries would be able to push through unpopular austerity programs to rein in their ballooning budget deficits. Meanwhile Spain said its budget shortfalls will be worse than anticipated in the coming three years.

"There's a threat that the weakening of foreign economies could put more pressure on an economic recovery in the U.S.," said Kim Rupert, managing director of global fixed income analysis at Action Economics.

The yield on the two-year note maturing in January 2012 fell to 0.81 percent from 0.89 percent. Its price rose 5/32 to 100 4/32.

The yield of the 30-year bond that matures in November 2039 fell to 4.53 percent from 4.64 percent, while its price rose 1 25/32 to 97 15/32.

The yield on the three-month T-bill that matures May 6 was unchanged from 0.09 percent.

The cost of borrowing between banks fell fractionally. The British Bankers' Association said the rate on the three-month loans in dollars — the London Interbank Offered Rate, or Libor — dropped to 0.24875 percent from 0.24906 percent.