U.S. stocks closed near the lows of the trading session as a return of credit market concerns sparked a late market selloff.
"I think the market is trying to find a bottom, but the psychology is brittle," said Alec Young, equity market strategist at Standard & Poor's. "There are concerns with the liquidity problems right now, with credit spreads widening out and where is the next shoe to drop."
Credit spreads around the world continue to widen as the cost of capital rises and nervous investors have fled to low-risk U.S. government Treasury bills. Yields on the three-month bill fell below 4% for the first time since December 2005.
"Sentiment is getting really, really bearish, which is a good thing," said Tom Schrader, managing director of U.S. listed trading at Stifel Nicolaus. "At some point in the next three to four days we'll get a short-term bottom and a nice rally."
The Dow Jones Industrial Average closed well below 13,000 in intraday trading, the first time for the blue chip index since April 25. Meanwhile, the S&P 500 ended down 1.4% and is now down about 0.8% year to date. The Nasdaq Composite closed down 1.6% as tech stocks also saw notable weakness.
Countrywide Financial shares tumbled to session lows on reports the mortgage lender has been unable to raise money from the commercial paper market. CNBC's David Faber reported that the mortgage lender's 30-day commercial paper was being quoted at one point at 12.54%. The company has not responded to CNBC's calls.
The Federal Reserve resumed liquidity operations in the banking system, adding $7 billion of temporary reserves to the banking system on Wednesday, a day after refraining from open market operations on Tuesday. Last Friday, the Fed injected $38 billion in cash, the largest infusion since September 2001.
"People are thinking we're coming at the end of the selloff and that things are under control and realizing the Fed is going to inject capital as needed," said Adam Tracy, director of listed trading at Thomas Weisel Partners. "But it's just going to be a pretty volatile market for a while."
Tracy agrees the market may be closing in on a near term bottom, but says it will remain volatile.
"When you start hearing rumors of funds holding redemptions, the smallest thing can spook the market by a lot now," said Tracy. "But the overall selloff, at least in the short term, doesn't have a lot more to go."
In economic news, July consumer prices rose 0.1%, in line with forecasts, as gasoline prices fell during the month. Excluding volatile food and energy prices, the so-called core CPI advanced by 0.2% in July, also in line with expectations.
"I think we might have a little bit more on the downside but we might be close (to a bottom)," said Steve Massocca, co-chief executive officer at Pacific Growth Equities. "I think it's a good time to put money to work."
In corporate news, agricultural equipment maker Deere said profit climbed 23% in the fiscal third quarter -- topping analyst estimates -- as sales growth overseas offset falling sales in the U.S. and Canada.
An affiliate of buyout firm Kohlberg Kravis Roberts said on Wednesday it will lose about $40 million from selling $5.1 billion in residential mortgages and warned an additional $200 million hit could be coming. Shares of KKR Financial Holdings fell sharply on the news.
Agilent Technologies shares fell after the company reported third-quarter earnings below analysts' forecasts and lowered guidance for the fourth quarter. The maker of test and measurement devices blamed the weaker forecast to a "softer-than-normal seasonal increase in revenue because of weak Asian electronic measurement markets."
Shares of Amgen moved higher after the world's biggest biotech company said it will host a conference call on Wednesday after the close of trading. The notice comes days after Amgen said in a regulatory filing that it was preparing to cut costs as its lucrative anemia drug franchise is under pressure due to safety concerns.
Packaged foods maker Sara Lee said profit swelled above market expectations as sales climbed in nearly every division. The maker of Jimmy Dean sausage and Sara Lee baked goods posted net income of $117 million versus $8 million a year ago.
European Stocks Lower
European stocks closed mostly lower as concerns about the credit markets continued and risk aversion extended to the currency markets.
"This is mutating into something a lot more nasty," David Bloom, currency strategist at HSBC, told "Squawk Box Europe," adding that investors were abandoning positions in high-yielding currencies.
"If you've still got them you're not sleeping very well at night, just get out," said Bloom.
The London FTSE-100, Paris CAC-40 both closed lower, while the Frankfurt DAX ended with small gains.
Nestle pulled Switzerland's SMI out of negative territory as the world's largest food maker posted stellar earnings and took advantage of its depleted stock price to launch a $21 billion share buyback program. Shares of Nestle surged 6.7%.
Positive earnings were also delivered from British construction and services group Balfour Beatty, which posted a 36% rise in first-half profit after winning key U.S. contracts. But shares in the company fell 0.3%.
In merger and acquisition news Iceland's Kaupthing Bankagreed to buy Dutch merchant bankNIBC for about $4.1 billion.
Meanwhile, all of the nine Bank of England rate-setting members voted to keep interest rates unchanged at 5.75% in August, minutes to the central bank's meeting showed.
"With inflation coming down … and also the nine/nil vote, it does suggest a September rate hike (from the BoE) is now completely off the cards," said James Knightley, economist at ING Wholesale Bank.
Asian Markets Tumble
Asian markets were battered in the afternoon session Wednesday with Hong Kong and Singapore plunging. Australia shed almost 3% while Japan closed at its lowest for the year as investors sold out of risky trades amid growing credit jitters.
Shares of Mitsubishi UFJ Financial Group,Macquarie Bank and other large banks in Asia took a beating, hit by renewed concern about their exposure to the high-risk U.S. subprime mortgage market and turmoil in global credit markets.
Tokyo's Nikkei 225 average slide more than 2% to hit their lowest in more than eight months as financial shares and exporters were hit hard by concern over a slowdown in the U.S. economy. Matsushita Electric Industrial tumbled 5% after Nokia said it would recall 46 million batteries made by Matsushita and used in its mobile phones.
Hong Kong blue chips plunged 2.8% and China plays dived 3.5% in a broad selloff as worries about the health of credit markets escalated after a U.S. investment firm sought to block client redemptions. HSBC Holdings looked set to clock its fifth straight loss, having earlier hit a more than four-month low.
Singapore's Straits Times Index tumbled 3.4% lower as bank stocks extended earlier losses, mirroring falling shares on Wall Street and lower Asian markets.
China's Shanghai Composite Index hit a new record high in early trade but then fell flat as a wave of profit-taking hit the broad market. Shares began falling as the Hong Kong market tumbled.