Another bad signal from the job market and concern over a possible downgrade of British government debt sent stocks sharply lower Thursday.
Major stock indicators slid more than 1.5%, cutting nearly 130 points off the Dow Jones industrial average, after continuing claims for unemployment benefits set their 16th straight weekly record.
The report added to recent anxiety that the market may have moved too high too quickly on early signs of recovery in the economy. Despite a pullback this week, the Standard & Poor's 500 index is still up more than 30% from its 12-year lows in early March.
Investors were also worrying about how well governments can keep up with public spending to stimulate their economies after Standard & Poor's said Britain may have its rating cut because of rising debt levels. That would raise the cost of borrowing for the British government, which is taking a big role in bailing out that country's stricken banking system.
Even with governments pumping huge amounts of money into economies around the world there are still questions about how soon a rebound might take hold. In the U.S., home prices are still sliding and unemployment remains at a 25-year high.
"It raises questions about our own situation in terms of our deficits and our national debt," said Alan Skrainka, chief market strategist at Edward Jones, of the S&P report. "There are limits to how high you can take these numbers longer term."
The report weighed on bond prices. The yield on the 10-year Treasury note jumped to 3.36% from 3.19% late Wednesday.
The market did pull off its earlier lows in late afternoon trading, boosted in part by a huge spike in General Motors shares, which jumped more than 15% in the last hour of trading.
GM rose after it agreed with the United Auto Workers to a tentative deal on concessions. The move is a key step toward GM's efforts to restructure outside of bankruptcy court.
The Dow fell 129.91, or 1.5%, to 8,292.13, after earlier falling as much as 201 points. The Standard & Poor's 500 index fell 15.14, or 1.7%, to 888.33, and the Nasdaq composite index fell 32.59, or 1.9%, to 1,695.25.
In a sign of the market's uneasiness, the Chicago Board Options Exchange Volatility Index, or the VIX, jumped more than 8% Thursday, rising back above 30. Known as Wall Street's fear gauge, the VIX hit a milestone earlier this week when it fell below 30 for the first time since September. It hit a record 89.5 in October at the height of the financial market meltdown. The historical average is between 18 and 20.
Stocks wavered this week as the market's ethusiasm eroded amid disappointing data and a downbeat outlook from the Federal Reserve. On Wednesday, stocks gave up early gains and ended lower after the central bank said the economy was likely to shrink by more than expected this year.
Analysts say the market needs to see a continual stream of good news to draw in more buyers.
"The confidence building is a process and it's begun," said Gary Townsend, president and chief executive of Chevy Chase, Md.-based private investment group Hill-Townsend Capital. "Sometimes the market just needs a bit more time."
Analysts also say that a pullback is healthy in light of the market's two-month surge.
"A little bit of relief just makes sense," said Ron Weiner, president and chief executive of RDM Financial in Westport, Conn. "People are starting to understand that all these taxes and stimulus are probably not going to lead to a great, roaring recovery and some of these stocks may have gotten ahead of themselves."
Gains in large bank stocks helped curb the market's overall losses after Goldman Sachs raised its rating on large banks to "neutral."
JPMorgan Chase added 35 cents to $34.90, while Wells Fargo rose 58 cents, or 2.4%, to $25.04.
Regional bank stocks, however, suffered. Regions Financial tumbled 79 cents, or 16.2%, to $4.10 after it priced a public stock offering at a big discount. Fifth Third Bancorp fell 76 cents, or 9.9%, to $6.95, while Huntington Bancshares lost 52 cents, or 10.8%, to $4.30. Both banks also announced plans to boost their capital through public stock offerings.
A number of banks have announced stock offerings in recent weeks, which is a positive sign for the market that companies can once again turn to the public to raise cash. But stock offerings dilute current shareholders' stakes, and the huge influx of bank shares into the market has put pressure on the stocks.
In other trading, the Russell 2000 index of smaller companies fell 12.83, or 2.6%, to 476.52.
About three stocks fell for every one that rose on the New YorkStock Exchange, where volume came to 1.44 billion shares.
The dollar was mostly lower against other major currencies, while gold prices rose.
Light, sweet crude fell 99 cents to settle at $61.05 a barrel on the New York Mercantile Exchange after rising sharply earlier in the week. Investors worried that continued sluggishness in the economy would reduce demand.
Overseas, Japan's Nikkei stock average rose 0.2%. In Europe, stocks fell after the S&P warning about Britain's debt. The FTSE 100 in London tumbled 2.8%. Germany's DAX index fell 2.7%, and France's CAC-40 lost 2.6%.