"The market is over-priced," was the mantra of the bears. The speed with which stocks regained their pre-financial- crisis values doesn’t reflect the pace of the slow recovery taking place in the U.S., let alone the fragility of several important foreign markets, they argued. Dubai’s sovereign debt crisis last fall seemed to confirm their suspicions, but it passed like so much water off a duck’s tail.

Lots of other evidence seemed to uphold the new bull market. First-quarter corporate earnings were outstanding pretty much across the board. Indeed, according to data compiled by Bloomberg, revenue of companies included in the S&P 500 index rose an average of 13% from a year ago. At one point about halfway through earnings season Bloomberg estimated that 80% of all S&P 500 companies had beaten Wall Street’s expectations.

Other recent domestic data have appeared just as rosy. Consider Tuesday’s consumer confidence numbers, which rose for the third straight month, an indication that average Americans feel better about the direction the economy is headed. The housing market also got some good news this week: sales of previously owned homes rose 7.6%, the biggest improvement in five months, according to the National Association of Realtors. 

None of this matters any more, however, amid concerns raised by the Greek debt mess, and now the question is no longer whether stocks were overpriced and a market correction overdue -- they were and it was.

On Tuesday, the Dow Jones Industrial Average plunged nearly 300 points in early trading, again primarily on fears related to Europe. All but one of the 30 components of the Dow were in the red, led by Kraft (KFT: 28.37, 0, 0%), American Express (AXP: 39, 0, 0%) and Caterpillar (CAT: 59.25, 0, 0%). Stocks were also hit on worries about the stability of North Korea and that nation's intentions towards its neighbor to the south. 

Meanwhile, the broader S&P 500 has lost more than 12% from its post-crisis high on April 23. A rapid plunge of 10% or more is generally considered a correction.

Now the question is whether Europe will drag the rest of the world into a double-dip recession.

“This is more than a stock market correction,” said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, a public policy and economics research organization in Arlington, Va.

Waldman sees “a growing risk” that one of the largest economies in the world – Europe – is “quivering,” the result of a loss of investor confidence in “the structural integrity of the Euro zone” and its leaders’ ability to act in a decisive and unified manner.

Unlike the U.S., the 16-member European Union does not have a strong central economic structure that can step in and make decisions firmly and quickly, Waldman notes.

After Lehman Brothers collapsed in September 2008, a small group of U.S. financial leaders – namely Federal Reserve Chairman Ben Bernanke, former Treasury Secretary Hank Paulson and current Treasury Secretary Timothy Geithner – acted swiftly, lowering U.S. interest rates and pouring liquidity into faltering markets to head off a global chain reaction.  

The European Union isn’t set up that way and investors have grown increasingly skittish as, for instance, Germany and France have bickered over the best way to prop up fiscally wayward southern EU members such as Greece, Portugal and Spain.

Now fears that Greece’s problems will become the United States’ problems appear to be coming to fruition. The LIBOR rate, or the rate at which banks lend money to one another and a key barometer of the health of the global economy, is tightening again, much as it did after Lehman collapsed.

If credit markets go dry again it will be a body blow to the fledgling economic recovery. “The timing of this is just bad,” said Waldman, citing the persistently high unemployment rate in the U.S. “We were getting enough growth to be sustainable, then along comes a loss of confidence in a major trading partner in a major part of the world.”

And as was learned two years ago all aspects of the global economy are interconnected; once fear starts snowballing through one important market it’s very hard to keep it from spreading to others.

“Fear has consequences,” said Waldman. “A rout in U.S. stock markets is going to affect both business and consumer confidence - it almost has to.”