Fitch Ratings is warning that U.S. banks could be “greatly affected” if Europe’s sovereign debt woes continue to widen.  The report caused US stocks to drop 200 points on the Dow Jones industrial average late Wednesday.

Stocks stabilized at the open this morning after the government reported new claims for unemployment benefits last week dropped to a seven-month low and another report showed that housing starts fell less than expected in October. But the Europe concerns weighed on the markets, with the Dow off 170 points or 1.5 percent by early afternoon in a sell-off that included gold, down $55 an ounce to $1,719, and crude oil, down $3.88 a barrel.

Fitch said that exposure by US banks to the stressed European markets of Greece, Ireland, Italy, Portugal, and Spain were manageable but there’s concern that the debt woes are spreading to the larger economies of the region.

The ratings agency said the six largest US banks hold about $50 billion in debt from the stressed nations. But exposure to the major economies of Europe is much larger.  The top five US banks have $188 billion in exposure to French banks alone and $225 billion in exposure to the UK.

“Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken,” the agency said in its report. “Currently, Fitch’s rating outlook for the U.S. banking industry is stable, reflecting improved fundamentals at most banks, coupled with generally lower ratings versus pre-crisis levels.”

Another worry is exposure to possible sovereign debt losses by money market funds affiliated with major US banks.   The 10 largest US prime money market funds, three are of which are affiliated with U.S. banks, have $89 billion in exposure to  as of Sept. 30, 2011.

“Any prolonged turmoil could negatively affect capital market-related revenues well into the future, not to mention the possible effects on loan portfolios and other revenue opportunities,” Fitch said.