Stocks were softening at Thursday open as fears Spain and France will get engulfed in the debt crisis overshadowed positive U.S. economic reports.

NEW YORK (TheStreet) -- Stocks were falling Thursday as fears Spain and France will be engulfed by the eurozone's debt crisis overshadowed positive economic reports from the U.S.

The Dow Jones Industrial Average was down 16 points, or 0.13%, at 11,890. The index has traded down two of the last three sessions. The S&P 500 was down 2 points, or 0.2%, at 1234 and the Nasdaq was shedding 5 points, or 0.2%, at 2635.

Earlier, Spain paid the highest interest rates on its 10-year benchmark in a government bond auction since 1997. Meanwhile, Italy's borrowing costs have soared to unsustainable levels, with yields on its 10-year bonds at 7.06% after topping 7% in the prior session. France, the eurozone's second-largest economy, had an easier time with its debt auction but still had to pay a markedly higher price.

Despite worries that the contagion is spreading, Germany has been steadfast that the European Central Bank cannot act as a lender of last resort. However, France has shown signs of letting the central bank expand its role in stemming the panic. French Finance Minister Francois Baroin suggested late yesterday that Europe give the ECB a bank license, thereby allowing the ECB to provide further funding for struggling nations.

"We consider that the best way to avoid contagion is to have a solid firewall" said Baroin. "We haven't won the argument. We won't make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe."

London's FTSE was losing 1.5%, and Germany's DAX was slipping by 1.2%. Overnight, Asian stocks closed mixed, with Japan's Nikkei Average edging up 0.19% and Hong Kong's Hang Seng down 0.76%.

U.S. economic data from the morning suggested that the labor market continues to improve. The latest read on weekly jobless claims in the week ended Nov. 12 dropped by 5,000 to 388,000, marking a seven-month low. The reading was better than economists had expected, although the prior week's claims were upwardly revised.

A 0.3% decline in housing starts in October to an annual rate of 628,000 suggested that the housing market is stabilizing and may become less of a drag on the economy. Starts were expected to have fallen to an annualized pace of 610,000 in October from the originally estimated pace of 658,000 in the prior month. September's figure was downwardly revised to 630,000. Meanwhile, October building permits increased by 10.9% to the highest level since March 2010.

"Housing data is firm due to the single family gains in starts and permits, though with permits the volatile multi-family sector is at least an eyebrow raiser," wrote David Ader, a strategist with CRT Capital Group, in a research note. However, Ader noted that the reports were consistent with other recent data. "We have a fourth quarter theme of firming," he added.

At 10 a.m., The Philadelphia Fed will release its business outlook index for November. The index is expected to slip to a reading of 8.0 from 8.7 in the month prior.

Little changed in terms of political action out of Europe overnight. Stocks closed the previous session on a down note, pressured by news that Fitch Ratings predicted a worsening outlook on the credit of U.S. banks if Europe's debt crisis deepens. According to Fitch, the six biggest U.S. banks as of the end of September had a total of $50 billion in risk related to exposure to stressed nations Greece, Ireland, Italy, Portugal and Spain. The Dow slid 1.6%, with most of the losses coming in the final hour of trading.

U.S. stocks often fight their way back up after European markets close, noted Marc Pado, strategist with Cantor Fitzgerald. But, he added, as with the prior session's trading, an entire day's gains can be erased in minutes.

"The reason why it was so easy to move the financials lower and the overall market as well is that this is a very light volume environment, between earnings season, before Black Friday, in the midst of global political turmoil, and ahead of the Super Committee vote," explained Pado in a research note.

Oil was slipping Thursday after prices broke above $100 a barrel Wednesday for the first time since early June. The December crude oil contract was down $1.46 to trade at $101.13 a barrel. In other commodities, gold for December delivery was down $28.40 to trade at $1745.90 an ounce.

In corporate news, Applied Materials(:AMAT) was falling 2.7% after the maker of semiconductor equipment reported a 3% drop in fiscal fourth-quarter earnings of $456 million, or 34 cents a share. Adjusted earnings were 21 cents a share. Analysts were expecting profit of 19 cents. The company also said current-quarter results would come in below analysts' expectations.

Google(:GOOG) was falling 0.08% after launching an online music service to compete with Apple(:AAPL), Amazon(:AMZN) and Facebook in the music and entertainment space. Google Music allows users to upload up to 20,000 songs from their personal music collection for free to any device, including their computer, Android phone or tablet.

NetApp(:NTAP) was plunging 8.9% after missing Wall Street's second-quarter revenue expectations and noting softness in some of its largest customer accounts. Despite, beating profit estimates, the storage provider offered weak guidance for the third quarter.

Sears(:SHLD) was falling 1.2% after its adjusted third-quarter loss of $2.57 a share came in wider than analysts' expectations and the year-earlier loss of $1.71 a share. Analysts forecasted a loss of $2.29 a share. The reported loss for the quarter was $421 million, or $3.95 a share, up from $215 million, or $1.98, a year earlier.

Williams-Sonoma(:WSM) was falling 1.8% after its third-quarter net income rose 19%. The home products retailer also raised the estimate for fiscal 2012 earnings.

The dollar was down 0.36% compared with a basket of currencies. In the bond market, 10-year Treasuries were gaining 3/32, diluting the yield to 1.99%.

-- Written by Chao Deng in New York.