Stocks closed off their worst levels Thursday, but were still down sharply, following a handful of disappointing economic news and over continuing worries over the stability of euro zone banks.
All three major indexes are on track for the worst month in almost three years.
The Dow Jones Industrial Average tumbled 419.63 points, or 3.68 percent, to finish at 10,990.58, led by Alcoa , BofA and Hewlett-Packard . The Dow was down almost 530 points in its session low.
The S&P 500 sank 53.24 points, or 4.46 percent, to close at 1,140.65. Many traders are now watching 1,101 as the next support level.
The tech-heavy Nasdaq tanked 131.05 points, or 5.22 percent, to end at 2,380.43.
Despite the day's sharp plunge, all three major indexes still finished at levels higher than last Monday's closefollowing S&P's U.S. credit rating downgrade.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged almost 40 percent to above 44.
All 10 S&P sectors were sharply lower, led by energy and materials.
Volume was heavier than usual with the consolidated tape of the NYSE at 6.12 billion shares, while 1.62 billion shares changed hands on the floor.
"Is this selloff really a surprise? The macro data continues to paint a dire fiscal future for the world—Investors are naïve to think this is a 'rough patch,'" said Todd Schoenberger, managing director of LandColt Trading. "The ingredients are in place for a prolonged period of the bears controlling this market. Investors need to proceed with caution."
Meanwhile, Zahid Siddique, portfolio manager of Gabelli Equity Trust, called today's move "an overreaction."
"We’ve always had these negative issues lingering, but nothing’s particularly new,” said Siddique.
Stocks were pressured following news that the U.S. federal and state regulators were intensifying their scrutinyof the U.S. arms of Europe's biggest banks, according to the Wall Street Journal.
European shares logged its biggest one-day decline in nearly three years, led by financials. Shares of European banks Deutsche Bank and Barclays fell sharply, dragging big U.S. financials such as Citigroup and Morgan Stanley .
On the economic front, factory activity in the Mid-Atlantic region plunged its worst level since Mar. 2009, according to the Philadelphia Federal Reserve Bank. And adding to the woes, sales of existing homes fell in July to a seasonally adjusted annual rate of 4.67 million homes, according to the National Association of Realtors, far below the 6 million that be sold to sustain a healthy housing market.
In addition, the Labor Department reported weekly jobless claims jumped 9,000 to a seasonally adjusted 408,000, the highest in four weeks.
Meanwhile, Morgan Stanley warned the global economy was "dangerously close to a recession" and revised their 2011 global growth forecast down to 3.9 percent from 4.2 percent and 2012 forecast to 3.8 percent from 4.5 percent.
“The path now looks even more bumpy, below-par and brittle than previously thought," Morgan Stanley said in a note, adding that emerging markets were no longer immune.
Investors flocked to gold as a safe-haven play, causing the precious metal to hit new highs, settling at $1,822 an ounce. Meanwhile, oil prices tumbled sharply. Big oil giants such as ExxonMobil , Chevron and ConocoPhillips were all trading lower.
Consol Energy was one of the few shares in the black amid a sea of red after Noble Energy said it will pay $3.4 to the energy producer to form a partnership to develop Consol's properties in the Marcellus shale.
Among techs, Hewlett-Packard posted preliminary third-quarter earnings that met expectations, but shares tumbled after outlook disappointed. HP shares were halted twice today.
In addition, the stock briefly spiked earlier after HP said it plans to spinoff its PC businessand acquire UK business-software company Autonomy for $10.2 billion. (Read More: Why Isn't HPQ Stock Up on PC Spinoff?)
NetApp plunged almost 15 percent to lead the S&P 500 laggards, after the data storage equipment maker said it expects a weak second quarter. In addition, at least nine brokerages slashed their price target on the firm.
Other large-cap techs were also saw a steep decline, including IBM and Oracle .
Sears declined after the retailer posted a bigger-than-expected loss. Meanwhile, Credit Suisse cut its price target on the firm to $40 from $50.
Coca-Cola announced it will plans to invest $4 billion more in Chinaover the next three years starting from 2012.
Also on the economic front, the Consumer Price Index gained in July, according to the Labor Department, amid higher gas prices. The core index also climbed. And the Conference Board reported its index of leading economic indicators rose in July, suggesting the economy won't see a robust gain as previously expected.
—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—
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