Stocks closed sharply lower as a probe of the home loan industry by New York's attorney general drew in the country's biggest mortgage finance companies and Washington Mutual warned the housing downturn would extend well into next year.
The S&P 500 had its biggest daily percentage drop since August.
New York Attorney General Andrew Cuomo said his office was sending subpoenas to government-sponsored mortgage financiers Fannie Mae and FreddieMac as part of a probe of the home loan industry.
Also, Washington Mutual, the largest U.S. savings and loan company, said the housing slump will persist through 2008, loan losses will rise and mortgage lending will fall to an eight-year low. Washington Mutual was also a focus of Cuomo's investigation.
The stock dropped 17.3 percent to $20.04. Shares of financial services companies slid as investors worried about fallout from persistent problems in the market for risky subprime mortgage debt.
"It seems every time there's any significant new headline that relates to the mortgage mess, that gets people spooked and the selling really starts to accelerate," said Eric Kuby, chief investment officer of North Star Investment Management in Chicago.
Trading was below average on the New York Stock Exchange, with about 1.66 billion shares changing hands, below last year's estimated daily average of 1.84 billion. On Nasdaq,
about 2.50 billion shares traded, ahead of last year's daily average of 2.02 billion.
Declining stocks far outnumbered advancing ones by a ratio of about 10 to 1 on the NYSE and by about 4 to 1 on Nasdaq. Stocks closed down sharply on fresh worries about turmoil in the credit markets.
GM kicked off the market’s bad day by reporting losses far worse than analysts expected. The news came the day after it unveiled a $39 billion non-cash charge in the third quarter. GM's losses were $2.80 per share compared with expectations of just 25 cents.
Microsoft , which said late Tuesday it dismissed Chief Information Officer Stuart Scott for violating unspecified company policies, added to the woes in the Dow Industrials.
Elsewhere, earnings season began to wind down and Time Warnermatched expectations with a profit rise in the third quarter, but its shares fell after earlier gains.
Crude inventories data for the week ending Nov. 2 gave traders pause.
Demand for fuel in the US fell 0.4 percent from a year ago, the U.S. Energy Information Administration said in its weekly report, a number that limited the impact of a further decline of 800,000 barrels in crude oil stocks in the run-up to peak winter demand season.
Oil threatened a record, then backed off in the afternoon session.
Prospects of $100-a-barrel oil sent shares of U.S. airlines tumbling, renewing talk in the industry of mergers and ticket price hikes as a way to hold onto profit margins.
The oil spike comes as a softening economy begins to threaten an industry only just recovering from years of cutthroat competition and a series of bankruptcies.
The bad news for the markets overall came as yet another economic report came in better than expected.
Non-farm worker productivity increased at the strongest rate in four years during this year's third quarter, the government said, in a report implying the economy could keep growing without generating inflation.
Productivity, or hourly output per worker, increased at a seasonally adjusted 4.9 percent annual rate in the third quarter, the Labor Department report showed. That was well ahead of Wall Street economists' forecasts for a 3 percent gain.
Still, the dollar continued to weaken and exchange traders were continuing to short-sell the greenback on anticipation of it falling further. The dollar fell after a senior lawmaker in China suggested a bigger role for the euro in the country's $1.43 trillion foreign reserves and a Chinese central bank official said the dollar is losing its global currency status.
Analysts agree, though, that market volatility will continue, reflected in the Volatility Index , which has remained above its tipping point of 20 to indicate a volatile market.