Stocks gave back the prior session's gains spurred by the Federal Reserve's plan to buy billions of U.S. debt as investors started cashing in some profits, particularly in sectors that have seen big runups like financials.
The Dow Jones Industrial Average and S&P 500 lost more than 1 percent. The Nasdaq ended down just 0.5 percent after Oracle blew its earnings target out of the water and as M&A buzz began to pick up.
This comes after a Fed-fueled rally on Wednesday that boosted all three major indexes more than 1 percent after the Fed said it would buy huge quantities of government debt. That brought the S&P's gain to 17.4 percent in the past seven sessions, its best seven-day gain since 1939.
As investors digested the Fed's plans, worry that pumping another $1 trillion into the financial system and juicing consumer- and small-business lending might spur inflation crept into the market.
And, of course, there's the fact that stocks have had such a solid run in the past seven sessions, many investors thought it was time to give back.
"You have to be a little careful here — we're in overbought conditions according to certain technical things and your 17 percent [in the S&P] is close enough to 18 percent, which is the usual, historic, initial move in a bear-market rally," Art Cashin, director of floor operations at UBS, said this morning on CNBC. "I've got a feeling we may be getting ready to pause here. If I'm wrong, and they blow through the 50-day moving averages, the shorts could panic and we could get an additional real spike. But for now, if I had to make the probability is I'd say a pause in here."
Citigroup and Bank of America gave up early gains, joining the rest of the sector in negative territory, as short sellers, who bet a stock will go down, moved in on some of the banks.
Citigroup shares lost more than 15 percent, after being up more than 20 percent in morning trading, as the bank offered to do a stock swapthat would boost capital and said it may do a reverse stock split, which would give the U.S. government a 36-percent stake in the bank.
Bank of America also retreated, shedding nearly 10 percent, after being up in morning trading.
Other financials were down throughout the day, including JPMorgan, which fell 8 percent, Wells Fargo, which lost more than 10 percent and US Bancorp, which shed nearly 10 percent.
In economic news, initial jobless claims fell by 12,000 last week to a seasonally adjusted 646,000; well below the 652,000 economists had expected. Meanwhile, continuing claims surged by 185,000 to a record 5.47 million.
The Philadelphia Fed reported its gauge of regional manufacturing activity improved to minus-35 in March from minus-41.3 in February.
Leading indicators fell 0.4 percent in February, a significant drop but still better than the 0.6-percent decline economists had expected.
The AIG bonus buzz continued with the Washington Post reporting that the bonuses came after the worst was already over and the company had defused some its most dangerous bets. AIG CEO Edward Liddy said Wednesday in testimony on Capitol Hill that the bonuses were necessaryto keep employees that could help the firm avoid huge losses based mostly on credit defaults swaps.
Some AIG employees are giving their bonuses back, according to the Wall Street Journal.
(Is it time to cash in your chips? Click on the video at left.)
Federal Express shares rose 4.8 percent after the package-delivery giant reported its profit tumbled 75 percent and issued a bleak outlook but said it was taking fresh actions to cut costs including decreasing its pension obligations.
Shares of CNBC.com-parent General Electric shed 1.8 percent after the conglomerate said it expects its GE Capital unit to be profitablethis year, though it could break even if the economy softens more than the Fed expects.
General Motors shares rose 8.7 percent following news that the government will give auto-parts suppliers up to $5 billion in aid. Ford shares gained 1.6 percent.
Shares of 3M lost 3.5 percent after Bernstein cut its price target on the stock, saying it expects the company to experience its worst annual growth in 40 years.
In the tech sector, shares of Oracle shot up 9.7 percent after the business software maker handily beat analysts' expectations for quarterly profit and sales after the bell Wednesday and also announced a dividend.
Citigroup raised its target price on Oracle to $21 from $20 and backed its "buy" rating on the stock, citing the fact that margins continue to grow despite slowing sales.
American depositary shares of Research In Motion jumped 3.3 percent amid buzz that it's launching its apps store later this month and that it's planning to get into the prepaid market later this year, a move that would expand its reach beyond corporate America to younger consumers.
Yahoo shares rose 2.4 percent as comments by Microsoft's Steve Ballmer rekindled buzz of a dealbetween the two.
"There are a lot of things that are fairly compelling economically in trying to put our two search efforts together in a partnership," Ballmer said. "I'm sure when it's appropriate, we'll have a chance to sit down and talk."
Cisco shares slipped 1.6 percent following news that it will buy the maker of the Flip video camera for about $590 million in stock.
Dow components ExxonMobil and Chevron ended mixed as oil prices rose more than $3, to settle at $51.61 a barrel.
Trading was brisk on the New York Stock Exchange, with 1.95 billion shares changing hands, well above last year's 1.5 billion daily average. Decliners barely outpaced advancers.
Still to Come:
THURSDAY: Earnings from Palm after the bell
FRIDAY: Quadruple witching; Fed's Bernanke speaks about financial crisis at bankers' convention in Phoenix