Stocks declined for a third straight day as the government's shift in how it directs bailout funds added to investor doubt about the effectiveness of government intervention seeped deeper into the market.
The Dow Jones Industrial Average fell nearly 200 points, or 2 percent, in the first few minutes of trading, and extended that to 300 as Treasury Secretary Henry Paulson spoke about government efforts to triage the cracking financial system.
>> Watch the live video feed of Treasury Secretary Henry Paulson
Paulson announced a major shift in the $700 billion rescue fund: That the government will back away from buying troubled mortgage assets from firms and use the money instead for a second round of capital injections into financial institutions that would match private funds.
General Motors was the only gainer on the Dow amid expectations that auto makers will get government help. Ford also advanced.
The debate over whether government money should be used to help the auto sector continued to rage. House Speaker Nancy Pelosi said she would bring the House back in session next week to discuss the contentious issue.
There's some buzz in the market that insurers could beat auto makers to the punch and get a bailout first. Genworth shares , which have dropped to around $1 from $25 in May, rose sharply pre-market on this buzz but then fell more than 10 percent in regular trading.
American Express was the biggest drag on the Dow, down more than 8 percent, piling on to Tuesday's nearly 7-percent drop after the credit-card provider received approval to become a bank-holding company.
Hedge-fund manager William Ackman told Reuters that GM should be restructured before it can receive any government cash. Other analysts say, if you bail out the auto makers, then where do you draw the line? Do you bail out Starbucks ?
Home values continued their downward spiral with their seventh consecutive quarterly decline, real estate Web site Zillow.com said.
Housing stocks continued to get hammered: Hovnanian and Lennar shed more than 7 percent.
Goldman Sachs continued its decline as the firm contemplates a new direction after the credit crisis.
Energy producers also were under pressure as oil prices held below $60 a barrel. Dow components ExxonMobil and Chevron shed more than 2 percent each.
Best Buy fell more than 10 percent after the discount retailer slashed its 2009 outlook because of the weak economy and intense pressure on consumers.
Macy's rose more than 2 percent after the department store reported earnings.
For the first time in almost a quarter century, holiday sales are expected to drop. America's Research Group projects that sales will fall 1 percent this year.
>> Check out CNBC.com's Holiday Central blog, your one-stop shop for news on how the season is shaping up for retailers.
Asian stocks ended broadly lower and European stocks struggled to remain above water.
WEDNESDAY: Weekly crude inventories; Fed's Stern speaks; Earnings Applied Materials after the bell
THURSDAY: Weekly mortgage applications; weekly jobless claims; international trade; Fed's Plosser, Stern speak; Treasury Budget; Earnings from Wal-Mart, Nordstrom, Kohl's
FRIDAY: Import/export prices; retail sales; business inventories; consumer sentiment; natural-gas inventories; Earnings from Abercrombie & Fitch, JCPenney
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