Stocks traded mixed after the Treasury offered to help prop up the auto makers after the Senate rejected the $14 billion bailout passed by the House.
The Dow Jones Industrial Average was flirting with positive territory after losing nearly 200 points in the prior session.
Stocks had opened lower, dragged down by the Senate's rejection of the $14 billion auto bailout and news of a $50 billion fraud scheme on Wall Street. Stocks pared their losses after the Treasury said it was willing to jump in to help prop up auto makersuntil Congress reconvenes and President Bush said he would consider using TARP funds to help bail out auto makers. Though, the market lost some ground after UAW President Ron Gettelfinger blamed the Senate GOP for the collapse of the deal.
The GOP wanted the UAW to bring U.S. auto-worker wages in-line with their overseas counterparts but the UAW has been resistant to make concessions on wages. Gettelfinger said comparing salaries of U.S. and overseas auto workers is like comparing apples and oranges, and called on the Treasury and Federal Reserve to help prevent the imminent collapse of auto makers.
General Motors shares plunged more than 15 percent after the company hired some of the biggest names in restructuring as it mulls a possible bankruptcy filing.
Ford shares fell nearly 10 percent.
Asian stocks plummeted, with the Nikkei closing down more than 5.5 percent, while European markets were deep in the red in morning trading.
As if the auto drama wasn't enough, news that a top Wall Street broker has been accused of a $50 billion fraud schemesent a ripple of shock through the market.
Bernard Madoff, a former chairman of the Nasdaq Stock Market and a fixture in Wall Street trading for 50 years, was arrested and charged with running the fraudulent investment program, which he confessed to his sons, before they turned him in, was a "giant Ponzi scheme."
At $50 billion, some analysts point out that this is a bigger scandal than either Enron or Tyco and threatens the long-term confidence of investors.
In economic news, the University of Michigan and Reuters reported their gauge of consumer sentiment jumped to 59.1in a mid-December reading from 59.1 in November, helped by the drop in gasoline prices and the aggressive discounts by retailers for the holidays. Economists had expected the gauge to fall further.
Reflecting recent declines in sales, businesses cut their inventories by the biggest amount in five years in October.
Earlier, reports showed that producer prices fell 2.2 percent in November, the fourth straight month of decline amid a sharp drop in energy costs, and retail sales fell 1.8 percent to a seasonally adjusted $355.66 billion last month. Gasoline-station sales fell by a record 14.7 percent. Both PPI and retail sales came in roughly in-line with estimates and had little impact on the market.
Caterpillar was one of the biggest drags on the Dow after Goldman Sachs slapped the construction-equipment maker's stock with a "sell" rating.
More bad news about the banking sector also hit the market from both sides of the Atlantic.
The negative headlines started Thursday when JPMorgan Chase CEO Jamie Dimon told CNBC that the banking giant has had a "terrible" November and December, sending its stock down 10 percent and prompting a selloff in financial shares.
Also on Thursday, Bank of America said it plans to cut 35,000 jobsover three years after it completes its purchase of Merrill Lynch.
Bank of America and JPMorgan both dropped about 4 percent and Merrilly fell more than 3 percent premarket.
In Europe, UK bank HBOS, which is being taken over by Lloyds TSB, said bad debts and other charges jumped to 8 billion pounds ($11.9 billion) this year as corporate and home loans soured.
Italian bank UniCredit, the country's second-largest, moved to bolster a key capital ratio by selling shares and amending a put/call accord on unit Bank Pekao shares.
And as officials wrangle about what needs to be done, the survival of the U.S. economy depends on helping homeowners, John Bogle, The Vanguard Group founder and former CEO, told CNBC.
Rewriting the terms, the maturities, the interest rates and payments on mortgages should be part of any homeowner bailout, Bogle said.
And Bernard Madoff, the former chairman of the Nasdaq Stock Market, was arrested and charged Thursday with running a $50 billion Ponzi scheme.