Disappointing stats on the job market added another layer of anxiety to a market already worried about a global slowdown, which sent stocks spiraling.
All three major indexes slipped back into bear-market territory, more than 20 percent below their October highs.
Initial jobless claims rose by 15,000 last week, snapping a three-week declining streak. Economists had expected claims to hold steady.
This followed a report from ADP payroll service that private employers cut 33,000 jobs from their payrolls in August. That was just slightly more than the 30,000 drop economists had expected.
The employment reports rattled the market's cage more than usual because Friday is the big August jobs report and investors are worried about what they might hear. Economists expect to see nonfarm payrolls shrink by 75,000.
"Although some of the recent increase in claims reflects technical factors—claims had been around 370k for months until they began to spike in the middle of July—the increase almost certainly reflects deterioration in the labor market," Tony Crescenzi of Miller Tabak wrote in a note to clients. "This deterioration will likely be evident in upcoming employment news."
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Upticks in service-sector activityand U.S. worker productivity, good signs for U.S. companies amid the economic slump, did little to console the market.
Adding to the selling pressure were comments from Bill Gross, manager of the world's biggest bond fund, that the government should give the Treasury department the right to buy debt and other assetsto stave off a financial crisis. The Pimco chief said he and other big investors are avoiding buying bank debt until the Treasury steps in.
Crude oil dropped nearly $1.50, settling at $107.89 a barrel,despite supplies being drawn down last week. Crude supplies dropped by 1.9 million barrels last week. Analysts had expected the supply to rise by 200,000 barrels. The hurricane watch continues with Hanna and Ike looming on the horizon.
The dollar hit its highest level against the eurothis year after the European Central Bank cut its outlook for euro-zone growth.
Boeing shares skidded after the aerospace giant's largest labor union rejected the company's proposed contract and voted to go on strike.
Retailers were largely in the red after the release of August same-store sales reports.
Wal-Mart hit it out of the parkfor the back-to-school season, reporting same-store sales rose 3 percent, about double what analysts had expected.
Wal-Mart shares rose 1.5 percent, making it the top gainer on the Dow.
Department stores including JCPenney and Kohl's reported sales fell but beat expectations.
But there were misses across the board, from luxury retailers to teen retailers — even wholesale warehouse club Costco .