The stock market suffered its second-worst beating of the year after coming under pressure from a variety of sources — dismal economic reports, more trouble in Europe and an ominous warning from Goldman Sachs.
Major indexes lost nearly 2 percent apiece, with the Nasdaq tech gauge registering the biggest drop.
All 10 sectors fell on the S&P 500, with energy — its exchange-traded fund proxy, the SPDR Energy lost more than 4 percent — and materials getting the worst of it.
It was the second time in three weeks the Dow dropped more than 250 points in a single session, with the bleeding contained only by gains from Merck .
Bad economic news kicked off the day and only got worse. That just exacerbated trader disappointment that the Federal Reserve, following its policy meeting Wednesday, had nothing more to offer the market than a continuation of its Operation Twist program of selling short-dated bonds and using the proceeds to buy longer-duration securities.
Some in the market expected more quantitative easing to help boost the flagging economy.
"We're just not in a period of expansion now," said Andre Julian, CFO and senior market strategist at OWM Asset Management in Newport Beach, Calif. "A lot of people were looking for more from the Fed. A lot more was priced in. A lot of investors are expecting QE now."
On the Dow, Alcoa and Hewlett-Packard got slammed and 17 of the 30 bluechip stocks lost at least 2 percent.
All seven of the major indexes in the Dow, S&P, Nasdaq and Russell closed below their 50-day moving averages.
The economy was the prevailing story of the session.
The Philadelphia Fedindex, considered a strong barometer of demand, posted a weak reading of -16.6, indicating contraction.
Other measures were no better: Weekly jobless claimsfell slightly but the four-week moving average rose to a 2012 high, while the Purchase Managers Index report from Markit said manufacturing grew at its slowest pace in 11 months as hiring slumped and demand waned. Finally, home sales fell in May though prices rose, casting doubts on a real estate rebound.
"The weak (Philadelphia Fed) reading is coincident with our belief that the economy has slowed in the spring and summer and we feel increasingly comfortable with our current outlook that suggests growth shouldn’t be all that much better as the year progresses," BTIG said in a note to clients.
Likewise, Goldman Sachs said the indicator bolstered the case that "the market will need to confront a deteriorating growth picture near term."
The firm recommends a short position in the Standard & Poor's 500, with a downside target of 1,285, representing a 5 percent drop from current levels. Traders said the Goldman market callhelped drive a more aggressive move lower in the market, which had been treading water for the first hour or so of trading.
"Nowadays when Goldman talks people listen," Julian said. "Really all they're looking at is the last level of support. So it's not out of the question that it could hit that because it failed breaking through the last level of resistance."
Stocks closed lower in Europe as concerns mounted over soaring borrowing costs, particularly in Spain and other debt-laden European Union countries.
"Unfortunately we're seeing a further deterioration in the euro zone economy, which is weighing on the global economy," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "The market is probably just going to stay in a trading range until we get something out of the EU summit."
The market was awaiting a likely report from Moody's, which is expected to downgrade 15 global investment banks. The KBW Bank Index fell 1.7 percent in afternoon trading, though the news of a potential Moody's downgrade had been known since February.
The CBOE Volatility Index , an options gauge of trader fear, surged 17 percent.
Across other markets, a rising U.S. dollar put pressure on commodity prices, sending gold below $1,600 an ounce and oil under $80 a barrel on a deflation trade. Silver was on track to close at a 17-month low.
The fall in energy stocks ripped across the explorers space, including Hess and others.
Homebuilder stocks also took a beating off the bad housing news, with the iShares Dow Jones Home Construction ETF slumping more than 3 percent.
Yields on government debt fell on safe haven demand, with the benchmark 10-year note dropping to 1.60 percent.
Market volume was average, with about 3.9 billion shares changing hands. Breadth was sharply negative with decliners clobbering advancers 4 to 1.
In company news, Best Buy dropped after the electronics retailer authorized a 6 percent dividend increase.
Bed, Bath and Beyond shares hit a two-year low after the company issued a downbeat earnings forecast after the closing bell Wednesday.
Chesapeake Energy shares fell as the company said it named five new independent directors to help oversee the troubled firm, including a new chairman to replace Aubrey McClendon, the CEO who has come under fire in recent weeks.
In earnings news, ConAgra Foods turned a profit of 51 cents a share in the quarter, a penny better than expectations, though sales were a shade below expectations.
Celgene shares plunged more than 10 percent after the drugmaker said it is withdrawing its application for new uses for its Revlimid drug, but plans to resubmit its application with more "mature data."
TJX shares climbed following an upgrade to "outperform" from "market perform" at Wells Fargo, which also raised earnings estimates for the T.J. Maxx parent.
Overnight in Asia, the HSBC Flash Purchasing Managers Index, which tracks activity in the private sector, showed China's factory output contracted for an eighth straight month in June. Export orders and prices turned in their weakest showing since early 2009.
European equities reversed losses after Spanish bond yields eased despite an auction that saw five-year paper hit a 15-year high. Stocks also sold off in Asia, dented by the weak Chinese data and disappointment over the extent of stimulus announced by the Fed.
Also in company news, Johnson & Johnson is close to reaching a settlement with the U.S. Justice Department over allegations it promoted anti psychotic drug Risperdal for unapproved uses that could cost the healthcare conglomerate at least $1.5 billion, the Wall Street Journal reported.