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Stocks Drop 4%, Dow Skids 500, Led by Banks

Stocks finished near session lows in choppy trading Wednesday, with the Dow and S&P wiping out all of the previous session's gains led by financials, as investors continued to cautiously monitor developments in the European banks.

The Dow Jones Industrial Average tumbled 519.83 points, or 4.62 percent, to finish at 10,719.94, wiping out the previous session's 429-point rally. The blue-chip index has had triple-digit moves in four of the last five trading days.

The Dow has now lost over 2,000 points, or nearly 16 percent, in the last 14 trading sessions (or since the close on Jul. 21). It’s the Dow’s worst 14-day decline since March 2009.

Disney and BofA led the blue-chip decliners.

The S&P 500 lost 51.77 points, or 4.42 percent, to close at 1,120.76.

The Nasdaq dropped 101.47 points, or 4.09 percent, to end at 2,381.05.

Both the S&P and Nasdaq have shed almost 17 percent over the past 13 trading sessions (or since the close on Jul. 13), which is the worst 13-day drop since Mar. 2009 and Nov. 2008, respectively.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared more than 20 percent.

Volume was heavy again with the consolidated tape of the NYSE at 7.91 billion shares, while 2.14 billion shares changed hands on the floor.

“In the long run, [volatility] is something we’re going to have to get used to until we get two things answered: One is the once-and-for-all solution to the euro zone debt crisis and the other is political consensus in Washington,” Art Hogan, managing director of Lazard Capital Markets told CNBC.

On Tuesday, stocks surged to see its biggest one-day gain since May 2010in wild day of trading even after the Federal Reserve's statement promising to hold interest rates at their current low level for the next two yearsdid little to alleviate fears over the economy.

According to a Reuters poll, economists saw odds of around one-in-three that the U.S. will slip back into recession, heightening expectations the Fed will launch another round of monetary easing.

Goldman Sachs also reviewed its position on monetary stimulus, saying there is a chance that the Fed will resume quantitative easing later this year or in early 2012.

Financials led the market lower, dropping more than 7 percent—Bank of America plunged 10 percent after the financial giant agreed to sell part of its home-loan portfolio to Fannie Mae in an effort to shed assets and pare its exposure to an array of mortgage woes, according to the Wall Street Journal. Meanwhile, at least two brokerages cut their price targets on the firm. BofA has plunged over 15 percent over the last week.

Rivals Citigroup , Goldman Sachs and Morgan Stanley also plunged nearly 10 percent each.

Meanwhile, Bank of New York Mellon said it is cutting 1,500 jobs as part of the bank's expense-reduction program.

HSBC confirmed it was selling its $30 billion U.S. credit card arm to Capital One Financial for a premium of $2.6 billion, as Europe's top bank streamlines its operations by getting rid of unwanted businesses.

European shares tumbled sharply, led by steep declines in French banks. Societe Generale and BNP Paribas plummeted amid rumors that France might lose its AAA rating. Meanwhile, Moody's reiterated its AAA rating on France and maintained its stable outlook on the country.

Meanwhile, JPMorgan CEO Jamie Dimon said he "is comfortable" with his firm's exposure in Europe and reassured investors that while U.S. banks may be facing numerous headwinds, they are not "zombies."

"Honestly, most of that stuff is hogwash," Dimon told CNBC, referring to well-known analyst Meredith Whitney's comments that large financials are "turning into zombies" because they have little net worth but are backed by the government and continue to meet their obligations.

Gold prices soaredtobriefly surpass $1,800 an ounce. (Read More: What's the Best Way to Invest in Gold?)

On the earnings front, Disney dropped almost 10 percent even after the conglomerate beat both profit and revenue expectations. In addition, at least four brokerages cut their price targets on the firm.

Macy's finished lower after the department-store chain reported a higher-than-expected profitand raised its earnings forecast. Meanwhile, Polo Ralph Lauren was among the few gainers on the S&P 500 after the retailer said its earnings surged on better-than-expected sales overseas.

Tech bellwether Cisco and media giant NewsCorp are slated to post earnings after-the-bell tonight.

Treasury prices gainedafter the government auctioned $24 billion in 10-year notes at a high yield of 2.140 percent and a bid-to-cover of 3.22. The government is scheduled to auction $16 billion in 30-year bonds on Thursday.

On the economic front, wholesale inventories posted their smallest gain in seven months as sales rebounded more than expected, according to the Commerce Department.

And weekly mortgage applications gained last weekas interest rates plunged to their lowest level in 2011, according to the Mortgage Bankers Association.

—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—

Coming Up This Week:

THURSDAY: International trade, jobless claims, 30-yr bond auction, money supply; Earnings from Kohl's, Nordstrom, Nvidia
FRIDAY: Retail sales, consumer sentiment, business inventories; Earnings from JCPenney

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