* Bank stocks decline in tandem with bond yields
* U.S. crude falls on expected Saudi and Russian output boost
* Indexes down: Dow 1.22 pct, S&P 0.9 pct, Nasdaq 0.35 pct (Updates comment, adds details, updates prices)
By Medha Singh
May 29 (Reuters) - U.S. stock indexes slumped on Tuesday, with bank stocks among the hardest hit, as a deepening political crisis in Italy triggered rush to safe-haven assets.
The S&P 500 and the Dow Jones Industrial Average were hovering near three-week lows on the prospects of a repeat election in Italy that has raised doubts about the country's future in the euro zone.
The news sent global stock markets on a tailspin, while assets perceived as safe havens, including gold and bonds, rose.
"Each time it happens people wonder is this the time the euro blows up?" said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
"If you wind up blowing up the euro then what happens to trade and commerce in general. Everything screeches to a halt."
Yield on the benchmark U.S. 10-year Treasury notes yield fell to their lowest level since mid-April to 2.84 percent.
The S&P 500 banking index fell 2.8 percent, on track for its worst one-day fall in over two months, led by losses in JPMorgan and Bank of America. Treasury yields can influence bank shares as higher lending rates tend to boost bank profits.
"There's been a bit of a pullback in yields and obviously with the contraction on the curve, there could be implications from a financial standpoint in terms of the banks' businesses that are tied to interest rates," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management in Chicago.
At 11:37 a.m. ET the Dow Jones Industrial Average was down 301.52 points, or 1.22 percent, at 24,451.57, the S&P 500 was down 24.61 points, or 0.90 percent, at 2,696.72 and the Nasdaq Composite was down 26.20 points, or 0.35 percent, at 7,407.65.
The S&P 500 opened below its 100-day moving average, a key technical level.
The only gainers were shares of consumer staples, utilities, real estate companies.
Shares of energy companies were led lower by a near 2 percent drop in U.S. crude futures on expectations that Saudi Arabia and Russia could pump more crude to compensate for a potential supply shortfall.
Exxon Mobil fell 0.4 percent, while Chevron was down 0.3 percent. Halliburton slipped 1.2 percent.
NXP Semiconductors NV rose 0.6 percent on a report on Monday that China is ready to approve the Qualcomm NXP deal if the United States lifts ban on ZTE Corp.
Declining issues outnumbered advancers for a 1.26-to-1 ratio on the NYSE. Declining issues outnumbered advancers for a 1.49-to-1 ratio on the Nasdaq.
The S&P index recorded seven new 52-week highs and four new lows, while the Nasdaq recorded 68 new highs and 28 new lows. (Reporting by Medha Singh and additonal reporting by Sinead Carew in New York; Editing by Arun Koyyur)