Dow Sinks 500, Worst Day Since Dec. 2008

Stocks plunged sharply Thursday, with the Dow down more than 500 points, in its worst one-day drop since December 2008.

All three major averages tumbled into negative territory for the year as investors were rattled over an intensifying global economic slowdown and ahead of the widely-followed monthly unemployment report.

The Dow Jones Industrial Average plummeted 512.76 points, or 4.31 percent, to close at 11,383.68, led by Alcoa and BofA . The last time the Dow dropped more than 500 points in a single session was in Dec. 2008.

The S&P 500 sank 60.27 points, or 4.78 percent, to end at 1,200.07.

The Nasdaq plunged 136.68 points, or 5.08 percent, to finish at 2556.39.

The major indexes are firmly in negative territory for the year. In addition, all three averages fell into "correction territory," defined by a drop of 10 percent from its peak from its intraday high in Apr. 29.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged more than 35 percent. The last time the VIX closed this high was on July 1, 2010.

Volume was at its highest level this year with the consolidated tape of the NYSE at 7.15 billion shares, while 1.82 billion shares changed hands on the floor.

"We're not steering this bus—it's all coming from Europe," Art Cashin, director of floor operations at UBS Financial Services told CNBC. "We’re hearing reports of funds drawing out of European banks and we’re pretty close to something that might turn ugly."

"It may translate into a strain on the financials system and earnings on the multinationals, which have been carrying the load for Wall Street," Cashin added.

European shares hit a two-year low. The Bank of England and European Central Bank both left rates unchanged, but it did little to improve investor confidence. The ECB signaled it was buying government bonds in response to a deepening European debt crisis.

Investors were also spooked after ECB President Jean-Claude Trichet said "downside risks may have intensified."

"It is true that we are experiencing a high level of uncertainty, not just in the euro zone," he said.

On the economic front, weekly jobless claims were little changed last week, edging down to a seasonally adjusted 400,000, according to the Labor Department.

“The jobless claims number was not too encouraging … we need to see more of a significant improvement than the data just squeaking by,” said Doreen Mogavero, president and CEO of Mogavero Lee & Company.

The claims news comes ahead of Friday's government non-farm payroll data, which likely increased 85,000 last month, according to a Reuters survey, after rising only 18,000 in June. The unemployment rate is expected to hold steady at 9.2 percent.

“We’ve reduced our equity exposure by half at the end of the second quarter,” said Rob Stein, portfolio manager and senior economist of Astor Asset Management. “We’ll need to see the economic data stabilize.”

Adding to day's woes, JPMorgan cut its third-quarter U.S. economic growth forecastby 1 percent, pointing to recent developments in the U.S. economy. The firm added that it doesn't expect the Fed to raise interest rates until at least 2013.

The dollar soared against a basket of currencies. The greenback's surge came amid a weakening economic outlook and moves by Japan to intervene in the forex market to bolster the yen.

Meanwhile, gold reversed its gains, trading below $1,653 an ounceas investors opted for cash to cover losses outside of the bullion market amid deepening losses on Wall Street.

Bank of NY Mellon announced it will start charging "large depositors" to hold cashdueto a sudden increase in dollar deposits prompted by fears among its customers.

All 10 S&P sectors were trading lower, led by energy, materials and industrials.

Oil prices tumbled, with U.S. light, sweet crudecrashing through technical support of $86.25 a barrel, its lowest level since February. London Brent crude fell below $109. Major oil giants ExxonMobil and Chevron tumbled.

Among earnings, GM fell even after after the automaker posted earnings that nearly doubled, as the firm a larger share of sales globally and raised prices on its vehicles.

Kraft Foods earnings beat estimates, raised its guidance and announced it will split in two. Major investor Nelson Peltz said he is excited about the split and has been increasing his stake in the firm. Berkshire Hathaway is also one of Kraft's biggest shareholders.

AIG and Sunoco are expected to post earnings after-the-bell tonight.

U.S. warehouse club operator Costco posted a better-than-expected chain-store sales, helped by higher gas prices and strengthening foreign currencies. Teen-oriented chains Hot Topic and Wet Seal blew past estimates, but rival Zumiez missed expectations.

Dendreon plunged over 60 percent after the drugmaker abandoned its forecast for its prostate cancer vaccine Provenge and said it plans to cut jobs to reduce costs.

Coming Up This Week:

FRIDAY: Employment situation, consumer credit; Earnings from P&G

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