Stocks fell Wednesday as Germany's move to ban some naked short-selling fueled a wave of fears about exposure to riskier assets.
Industrials were the day's worst performers, along with materials and energy. Health care and telecoms were the best performers.
The Dow Jones Industrial Averagewas down about 100 points in the final hour of trading, led by Caterpillar and Boeing .
The S&P 500 and Nasdaq were also trading lower. The CBOE volatility index, widely viewed as the best gauge of fear in the market, spiked above 35.
Bank of America and JPMorgan were among the top gainers on the Dow.
Market pros attribute the selloff to a combination of factors including the European fears, seasonal timing and economic uncertainty.
European stocks ended at their lowest level in nearly two weeks, led by banks, amid rising tensions over Germany's ban on some naked short sellingon Tuesdayand the impact of Greece and other nations with heavy debt loads on the European Union.
"Wall Street is against regulation and anything that tempers the normal course of the markets," said Marc Pado, U.S. market strategist at Cantor Fitzgerald.
This came as the SEC released proposed new rules on single stock trading, to prevent a stock being driven down to a penny like some were during the May 6 market freefall. And Congress is about to make a preliminary vote on financial reform.
Plus, there are concerns about the future of the euro zone.
"By Germany striking out and taking some actions on their own, it raises the concern of if Germany gets frustrated, they’re going to leave the euro zone — and the success of this bailout centers around Germany’s participation,” Pado said.
Meanwhile, the euro clawed backagainst the dollar and other currencies amid buzz in the market that Greece is considering leaving the EU. A spokesperson for Greece categorically denied the debt-riddled nation is considering such a move.
Earlier, the euro hit a four-year low against the dollar after German Chancellor Angela Merkel said the euro was in danger.
Oil dropped below $69 a barrelafter a report showed crude inventories rose by just 200,000 barrels last week, far less than expected. Gold continued its descent to back to earth, falling below $1,200 an ounce. The precious metal recently went as high as $1,250.
Minutes from the last Fed meeting show policy makers had a slightly better view of the economy in April than they did at the beginning of the year. Fed officials said the economy can grow between 3.2 percent and 3.7 percent this year — an upward revision from a growth range of 2.8 percent to 3.5 percent in their January forecast.
In addition, the Fed sees the unemployment rate, now at 9.9 percent, dipping to between 9.1 percent and 9.5 percent by year-end.
Hewlett-Packard advanced after the company beat earnings expectations and raised its full-year outlook. Analysts are mixed: At least two brokerages raised their price targets on the stock, while two lowered their targets.
Target also topped forecastsas consumers have begun to spend more on discretionary items such as clothing and electronics. S&P Equity raised the firm to "buy" from "hold."
This came as Walmart reported a same-store sales declineas more shoppers are trading up.
Lawnmower maker Deere also topped forecasts and raised its full-year outlook.
Shares of Visa , MasterCard and Capital One bounced back after being hammered on Tuesday. The credit-card networks have been under pressure amid fears that financial reform that could give more power to the Fed to regulate card feeswould hurt profits.
Elsewhere in the financial sector, Ambac Financial dropped almost 10 percent after the bond insurer reported a wider quarterly loss on Tuesday.
Zions Bancorp declined 3 percent after the regional bank announced a public offering of $150 million of warrants to acquire its common stock as part of its capital-raising plans.
Chips started to claw back after see-sawing earlier. The sector took a beating on Tuesday amid buzz that overseas sales of computers and gadgets may not live up to expectations.
Still, Sterne Agee initiated coverage of Apple with a "buy" ratingand slapped a $300 price target on the stock, saying it doesn't see a slowdown for the iPhone and iPad maker.
On the M&A front: Yahoo shares fell after the search engine firm said it agreed to acquire Associated Contentto add more pages to attract advertisers.
Symantec is close to acquiring VeriSign’s widely used technology for securing payments over the Internetin a deal worth $1.3 billion, according to sources.
Google is also buying Oslo-based Global IP Solutions for $68 million to build its real-time audio and video Internet capabilities.
Also, Google surpassed Microsoft in the battle over the software that runs cell phones.
Meanwhile, Goldman Sachs raised the ratings of a number of retailers such as Home Depot, Macy's and Target to "buy."
Goldman also raised its price targets on homebuilders Lennar , KBHomes and Pulte .
In the day's economic news: Consumer prices slipped 0.1 percentin April and were flat excluding volatile food and energy costs. This came after the Labor Department reported Tuesday that the producer price index rose 0.2 percent last month.
And some dismal news on the housing front: Mortgage applications tumbled more than 27 percentto their lowest level since May 1997 as the government stimulus expired, and one in seven U.S. mortgages is now delinquent or headed for foreclosure.
Still to Come:
WEDNESDAY: FOMC minutes; Google developers’ conference; earnings from Applied Materials after the bell
THURSDAY: Toyota/NHTSA hearing; BOJ monetary policy meeting; weekly jobless claims; leading indicators; Philadelphia Fed survey; earnings from Computer Sciences, Gamestop, Staples, Dell, Gap
FRIDAY: Earnings from Ann Taylor
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