Dow sheds 370 points; stocks close lower and wipe out monthly gains on Trump fears

• The Dow and S&P recorded their worst day since September of last year. The Nasdaq composite posted its worst session since June 24.
• Traditional safe havens, in turn, caught a bid as the benchmark 10-year yield fell to about 2.21 percent. The yen also rose against the dollar to trade at 111.05.

U.S. equities closed sharply lower on Wednesday as investors fretted over the latest news coming out of Washington.

"This is clearly Washington-driven," said Michael Shaoul, chairman and CEO of Marketfield Asset Management. "It's a lot like 1998-99, when the market had to deal with the [Monica] Lewinsky scandal."

The Dow Jones industrial average ended about 370 points lower, with Goldman Sachs contributing the most losses. The S&P 500 dropped 1.8 percent, with financials tumbling 3.1 percent to lead decliners. Financials posted their worst day since June 24 were pulled down by banks, with the SPDR S&P Bank ETF (KBE) falling 3.9 percent.

The Nasdaq composite lagged, shedding 2.6 percent, and posted its worst session since June 24.

The major indexes also gave up their gains for the month. The Dow and S&P also recorded their worst day since September of last year.

NBC News confirmed Tuesday a report from The New York Times that former FBI Director James Comey put together a memo outlining a conversation in which President Donald Trump allegedly asked him to halt an investigation into Michael Flynn, the former national security adviser.

Later on Tuesday, House Oversight Committee Chairman Jason Chaffetz asked the FBI for any records it has on communications between Trump and Comey.

"Earnings have provided a good fundamental base for the market, but I'm beginning to wonder if this news item is the straw that breaks the camel's back," said David Schiegoleit, managing director of investments at U.S Bank Private Client Reserve.

Traditional safe havens caught a bid as the benchmark 10-year yield fell to about 2.21 percent. The yen also rose against the dollar to trade at 110.99.

"If special prosecutors are hired or there is more talk about obstruction of justice being an impeachable offense, one can kiss the tax plan, health care plan, and fiscal stimulus plan goodbye for 2017," Andy Brenner, head of international fixed income securities at National Alliance Securities, said in a note Monday.

Stocks have rallied all year in part because of the hope for lower corporate taxes. Lately, the major indexes have pushed towards record levels, with the S&P and Nasdaq notching all-time highs earlier this week.

The administration has said in the past that it uses the stock market as its economic report card, but the White House said Wednesday it had no comment on the sell-off.

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But equities would take a big hit if Trump were impeached, Jack Welch, the former CEO of General Electric who has the president's ear, told CNBC on Wednesday. "An impeachment proceeding would blow the market away," Welch said on "Squawk Box."

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped more than 40 percent Wednesday, lifting it to its highest level since April 21.

"We've had ultra-low volatility for most of this year. These days tend to happen and people sometimes forget that," said Jeremy Bryan, portfolio manager at Gradient Investments.

The risk to the Trump agenda also presents a problem for the Federal Reserve, said Larry McDonald, author of The Bear Traps Report and head of global strategy at ACG Analytics.

"Wall St's calling for 2-3 more rate hikes this year, seven over the next two years – but Mr. DXY says no way Jose. The FOMC could very well be on Hold for the Rest of 2017," McDonald said in a note.

The dollar index (DXY) hovered near its lowest level since November.

The Fed has signaled it intends to raise rates twice more this year, after a quarter-point hike in March. The central bank's policymaking committee is slated to meet next month. Market expectations for June rate hike are 69.2 percent, according to the CME Group's FedWatch tool.

The Dow Jones industrial average fell 372.82 points, or 1.78 percent, to close at 20,606.93, with Goldman Sachs leading decliners and UnitedHealth the top advancer.

The S&P 500 dropped 43.64 points, or 1.82 percent, to end at 2,357.03, with financials leading nine sectors lower and real estate outperforming.

The Nasdaq pulled back 158.60 points, or 2.57 percent, to close at 6,011.24.

About four stocks declined for every advancer at the New York Stock Exchange, with an exchange volume of 900.53 million and a compostie volume of 4.146 billion at the close.

—CNBC's Christine Wang, Jacob Pramuk and Patti Domm contributed to this report.

On tap later this week:

Thursday

Earnings: Wal-Mart, Alibaba, Applied Materials, Autodesk, Salesforce.com, Gap, Burberry, Ralph Lauren, McKesson, Ross Stores, Buckle, Eagle Materials

8:30 a.m. Initial claims

8:30 a.m. Philadelphia Fed survey

1:00 p.m. Cleveland Fed President Loretta Mester

Friday

Earnings: Campbell Soup, Deere, Foot Locker

9:15 a.m. St. Louis Fed President James Bullard