Stocks closed sharply lower, with the Dow dropping more than 200 points, amid continuing anxiety about the credit markets and a weak earnings outlook from Wal-Mart.
"I still feel the market is headed for a lower low," said Byron Wien, chief market strategist at Pequot Capital Management. "But I don't think that what's going on in the credit markets and subprime market is going to spill over into the economy thoroughly."
The Dow Jones Industrial Average posted a triple-digit loss. The Dow has closed down four straight sessions. Investors, already jittery about the credit markets, became more concerned after reports of liquidity problems at a money market fund and more negative headlines for mortgage lenders.
CNBC's Steve Liesman reported that Sentinel Management Group, an Illinois-based money market mutual fund for commodities, plans to halt redemptions because so many investors are trying to pull money out of the fund. Sentinel, which oversees about $1.6 billion in assets, told clients it wants to block redemptions to avoid a forced liquidation.
"There are reports that Sentinel is looking to halt redemptions from their fund and we're also hearing some issues with the commercial paper market in Canada," said Mike Malone, equity sales and trading analyst at Cowen. "I think that is further confirmation that conditions in the credit markets remain very difficult and I think that's concerning to equity markets."
Shares of Thornburg Mortgageplunged more than 44% after the company said it would not accept new lock-in requests for mortgages for four business days. Analysts at numerous brokers lowered their ratings on the real-estate investment trust. The company said after the market close that it was delaying payment of its quarterly dividend for a month.
The selloff was broad-based, with all ten S&P 500 sectors trading in the red. The influential financials sector was among the biggest losers, falling more than 2%. Brokerage stocks took a hit and homebuilders were weak.
Consumer discretionary stocks also suffered as retailers declined. Wal-Mart weighed on the Dow as the worst percentage performer, dropping more than 5%. This was Wal-Mart's worst day since 2002. Home Depot was the second biggest percentage loser on the Dow, declining more than 4%.
"We're seeing a mini-panic, which is symptomatic of a market that is finding a bottom," Michael Metz, chief investment strategist at Oppenheimer, told CNBC.com. "This latest news about the money market fund tipped the scale and triggered more selling."
"The market psychology is very brittle right now," Alec Young, equity market strategist at Standard & Poor's, told CNBC.com. "Right now we should be seeing some signs of stabilization, but we're having trouble getting momentum. The financials are the anchor that keeps weighing down the market. People don't know where the bodies are buried."
Wal-Mart Storescut its quarterly andfull-year earnings estimate, saying that economic pressure weighed on sales. The world's largest retailer missed expectations for its fiscal second-quarter profit and revenue, reviving concerns about future U.S. consumer spending.
Meanwhile, Home Depot surprised with quarterly profit and sales above market expectations, but said it expected the housing environment to remain weak throughout next year.
Mattel announced its second major Chinese-made toy recall in two weeks, recalling millions of toys due to hazards from small, powerful magnets and lead paint.
The Labor Department said the July Producer Price Index, which measures wholesale prices, rose 0.6%, higher than the 0.2% increase analysts surveyed by CNBC and Thomson Financial were expecting. However, the core rate, which excludes volatile food and energy prices, rose a modest 0.1%.
The Commerce Department said the trade deficit fell to $58.1 billion in June, a four-month low. Record exports of farm goods and autos offset a rise in oil prices. Analysts were expecting the trade gap to widen to $61 billion.
Treasury prices rose, sending yields lower, in a flight-to-safety bid.
In other news, the much-anticipated initial public offering of technology pioneer VMware hit the market Tuesday, after pricing shares at the top of its range Monday. Shares shot up and traded as much as 85% higher than the IPO price.
Shares of Fortress Investment Corporation fell after the hedge fund and private equity company posted a wider second-quarter loss.
New York light sweet crude futures rose to trade above $72 a barrel after Tropical Storm Dean formed in the Atlantic Ocean Tuesday. Forecasters said it could become the first Atlantic hurricane of 2007 later in the week.
European Stocks Finish Lower
European stocks closed lower despite an easing of liquidity and normalizing overnight lending rates.
The European central bank said in a statement that money-market conditions were close to normal and the Bank of Japan actually withdrew cash from the banking system.
But investors across the continent were wary of the possibility of more bad news related to U.S. subprime lending defaults.
"We have a potential credit crisis brewing here. I think you need to be defensively playing like a good football team, you've got to look for the attacks, but it's all about defense right now," Steen Jakobsen, chief investment officer at Saxo Bank, told "Squawk Box Europe."
The Paris CAC-40 and the Frankfurt DAX finished lower following weaker-than-expected second-quarter growth results for the French and German economies. The FTSE-100, which had been higher for much of the session, after U.K. inflation data come in lower than expected, ended lower as well.
European banks continued to feel the pinch from difficult market conditions as Switzerland's UBSwarned its second-half profit was likely to slip compared to last year's second half. Shares in the world's largest wealth manager fell despite strong second-quarter results.
But the battle for ABN Amro pushed ahead with the Royal Bank of Scotland-led consortium announcing it built up a 3.25% stake in the Dutch bank.
Also on the earnings front, British hotel group InterContinental posted a 5% rise in first-half operating profit and said the outlook for 2007 was positive as it signed up more hotels around the world.
In other news, Dutch insurer Aegon agreed to buy Merrill Lynch Life Insurance and ML Life Insurance of New York for $1.3 billion in cash.
Asian Stocks Mostly Lower
Asian markets were mostly lower Tuesday. But Tokyo stocks managed to eke out a gain to finish just slightly higher. South Korea though dropped 1.7%. Trading remained volatile, with investors discouraged after U.S. stocks failed to rebound Monday as worries about the availability of credit and potential exposure of funds to the U.S. subprime mortgage sector continue to grip markets.
Tokyo's Nikkei 225 average closed slightly higher as trading firms such as Itochu Corp. and other energy-related stocks lured buyers looking for cheap valuations and solid profit prospects after recent falls. Shares of infrastructure-related firms such as Kawasaki Heavy Industries and Komatsu rose after a newspaper report that India is planning a range of such projects.
South Korea's KOSPI shed 1.7% to finish at a six-week low and could now be in the middle of experiencing a correction as fears about the impact of a credit squeeze in global markets continue to pound blue chips, including SK Energy.
Australia's S&P/ASX 200 Index closed lower, led down by banking shares, after mortgage lender RAMS Home Loans Group said volatility in global debt markets could hit earnings, adding to jitters about credit markets.
Most Chinese stocks were higher, boosted by expectations for strong earnings and more fund inflows, though the main index edged down as financial large-caps were hit by profit-taking after surging on Monday.
Hong Kong blue chips were little changed in quiet trade as investors held to the sidelines amid caution over the prospects of a credit squeeze, although Harbin Power surged on upbeat earnings. Heavyweight HSBC Holdings' exposure to the U.S. subprime problem continued to weigh on the market, offsetting gains in life insurer Ping An Insurance, which was supported by a broker upgrade.
Singapore's Straits Times Index was flat with bank stocks like DBS Group, weighing on the market.