Stocks closed sharply lower after being down all day on Fed Chairman Ben Bernanke's remarks that "economic uncertainty" has increased.
"The market has these little flips up and down but it's been quiet and down all day long," said Mike Driscoll, head of listed trading at Bear Stearns. "It points to very extreme skittishness both ways here, and I don't think people have a handle on which way the market is going."
The major markets managed to reverse an early selloff at midday but took back those gains heading into the close. Adding to Wednesday's wild trading action were rising geopolitical concerns which caused an overnight spike in oil prices.
"The last couple of days I'm attributing to nothing more than a pullback and profit-taking after last week, which was one of the strongest weeks in two to three years," Driscoll said. "There is a little choppiness here. I'm not really concerned."
Stocks sold off across the board as all ten S&P 500 sectors closed lower, led by telecom and financials, and breadth was negative on the NYSE with decliners leading gainers by more than two to one. Altria -- which Goldman Sachs added to its top buy list -- was the lone gainer among the 30 components in the Dow Jones Industrial Average.
"If you look at the outperforming sectors, it's all the trend-related stuff, like basic materials, that investors are buying knowing that they aren't going to get killed the next day because some fund manager wakes up on the wrong side of the bed," Steven Lord, chief investment strategist at The Trend Investment Group, told CNBC.com.
"They are willing to sit and hold but I also think that there is a high likelihood the correction will take (the Dow) below 12,000 before this thing has worked its way through," Lord said.
Bernanke said in a prepared statement on Wednesday that "economic growth in the United States has slowed in recent quarters" as the U.S. economy's rapid expansion has transitioned to a "more sustainable rate of growth."
"The expectations were there that he would say something positive and when he didn't the market got hit," said Marc Pado, chief market strategist at Cantor Fitzgerald, in an interview with CNBC.com.
Bernanke acknowledged the recent decline in new-home sales and said industry weakness "is likely to remain a drag on economic growth for a time" as homebuilders reduce inventories.
"I think we have to keep an eye on what the federal government is going to do in regards to the subprime thing," said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus. "If they step in and start to over regulate the industry it will significantly hurt the liquidity of the mortgage market and that can do more damage."
New York light crude futures topped $64 a barrel on heavy and volatile trading due to rising political tensions wtih Iran and the potential for supply disruption.
Beazer Homes fell on Wednesday after the company confirmed news of a federal probe of its mortgage business. "At this time, there have been no allegations of any wrongdoing," the company said in a statement, a day after the FBI said it was "conducting a potential fraud investigation" of Beazer.
Shares of Circuit City Stores rose after the electronics retailer announced Wednesday it will lay off approximately 3,400 employees and hire lower-paid replacements.
Drugmaker Merck and research partner Lundbeck said they was halting development of insomnia drug gaboxadol due to disappointing results from recent clinical trials.
Dow component General Motors shares declined on reports the automaker will not be submitting a bid for DaimlerChrysler Chrylser unit. That would leave private equity firms and an auto parts supplier still in the hunt.
Accenture rose after the consulting firm reported strong quarterly results and issued 2007 earnings guidance above Wall Street analysts' consensus estimates.
The government issued a weaker-than-expected durable goods report this morning, which set a negative tone in the markets early on. It was the fourth monthly decline in durable goods orders in the last five months.
Treasury prices ended marginally higher, pushing yields down, but the fixed income markets closed well off session highs.
Europe, Asia Close Down Slightly
European stocks closed lower on Wednesday on U.S. economic uncertainty. The Frankfurt DAX , the Paris CAC-40 and London's FTSE-100 all ended in negative territory.
Britain's benchmark index was led by retailer Next, up more than 3%, on continued speculation that it will be the subject of a private equity takeover bid. Gains in shares of BP and other energy companies helped limit losses.
J. Sainsbury, the supermarket group at the center of takeover speculation, released fourth-quarter sales at the top of forecasts and said its recovery plan was on track.
Tokyo's Nikkei 225 Average closed lower as exporters such as Honda Motor slid on a higher yen and caution about the U.S. economy, offsetting gains in Inpex Holdings and other energy shares.
South Korea's Kospi index posted the largest decline in two weeks as rising oil prices sparked selling in transportation stocks while exporters such as Hyundai Motor fell after weak U.S. consumer confidence raised worries about a key market.