Stocks Nosedive 2%, Dow Ends Down 350 on Fed Taper Talk; Vix Tops 20 for First Time in 2013

Stocks took a sharp nosedive across the board Thursday, with the Dow and the S&P 500 posting their worst day of 2013, after Federal Reserve Chairman Ben Bernanke hinted the central bank may scale back its asset purchases later this year.

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With the declines from the last two sessions, the Dow and S&P 500 wiped out all of their gains from May and June.

S&P 500

The Dow Jones Industrial Average plummeted 353.87 points, or 2.34 percent, to end at 14,758.32, with all 30 components in the red. The last time the blue-chip index closed down more than 300 points was last November. The Dow is down more than 5 percent since its May closing high.

The S&P 500 tanked 40.74 points, or 2.50 percent, to close at 1,588.19, crashing through a key 1,598 level that traders had been watching. And the Nasdaq tumbled 78.57 points, or 2.28 percent, to finish at 3,364.63.

All three major averages were back in negative territory for the week, and on track for their fourth-weekly decline in the last five weeks.

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The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiked near 20, hitting a new high for the year.

All key S&P sectors finished sharply in the red. Defensive names have been getting hit the hardest over the last two days, the last two days, with utilities and telecoms down more than 4 percent each.

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Total volume on the NYSE ended at 4.53 billion shares, marking the second heaviest volume day of the year.

"We shouldn't be surprised by what the Fed said yesterday—Bernanke had already mentioned this in his speech back in May and we saw an immediate reaction in the bond market," said Quincy Krosby, market strategist at Prudential Financial. "We haven't had a meaningful correction in the market and if this selloff continues…it doesn't mean the market is going to collapse; it is essentially recalibrating—the road to normal is going to be filled with detours."

Fed policymakers said in a statement Wednesday that the central bank would keep buying $85 billion in bonds a month. But in a press conference, Bernanke said if the economy continues to improve, the central bank could could start winding down its asset-purchasing program towards the end of 2013 and wrap up in 2014.

"The FOMC [Federal Open Market Committee] was more hawkish than we had expected," wrote Goldman Sachs economists Jan Hatzius and Sven Jari Stehn. "Our takeaway is that the risk to our forecast of quantitative easing tapering starting in December has increased."

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Bernanke's comments sparked an initial selloff Wednesday, with the Dow closing down more than 200 points. The benchmark 10-year yield continued to rise even further Thursday to 2.469 percent, hitting its highest level since August 2011. Gold prices tumbled more than 6 percent, falling below $1,300 an ounce for the first time since Sept. 2010.

European shares closed deeply in the red across the board with the FTSEurofirst 300 index falling nearly 3 percent. Markets in Asia were slammed, with the Japanese Nikkei closing down nearly 2 percent. South Korea's Kospi and the Shanghai Composite traded near 2013 lows.

(Read More: Global Markets Feel the Sting of Fed's Tapering)

Adding to woes in Asia, China's HSBC Flash Purchasing Manager's Index, a preliminary reading of manufacturing activity, fell to a nine-month low in June.

On the economic front, existing home sale jumped in May to its highest level in 3-1/2 years, according to the National Association of Realtors. But shares of homebuilders plunged amid worries that mortgage rates might rise after Bernanke said the central bank could reduce the amount of money it pumps into the economy later this year. Pulte, DR Horton and Lennar rounded out the top three worst performers on the S&P 500 index.

Factory activity in the mid-Atlantic region rose to 12.5 in June, according to the Philadelphia Federal Reserve Bank, trumping expectations for a reading of minus 2. Any reading above zero indicates expansion in the region's manufacturing. And a gauge of future economic activity touched its highest level in nearly five years in May, according to the Conference Board.

But traders shrugged off the positive reports.

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Meanwhile, jobless claims jumped 18,000 to a seasonally adjusted 354,000 last week, according to the Labor Department.

At its press event, Facebook introduced video features on its photo-sharing app, Instagram, where users will be able to record 15 second clips and choose from 13 video filters. The new product comes just six months after the release of Vine, Twitter's six-second mobile video capture application.

Also among techs, Microsoft declined after reports that the tech giant had planned to acquire Finland's Nokia, but talks had broken down.

Separately, Microsoft announced a major change to its Xbox One videogame console, saying it will no longer require an Internet connection to play offline games. It also dropped all restrictions on trading games, and did away with region-locking restrictions. Gamestop bucked the negative market trend, soaring nearly 7 percent to lead the S&P 500 gainers.

Among earnings, Kroger posted earnings that topped expectations and lifted its full-year profit forecast.

Oracle is slated to post earnings results after the closing bell.

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

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