"The Fed almost seems like it's its own worst enemy. It's confusing to say the least the way they came out with their latest ideas," said Mike Burnick, director of research at the Sovereign Society. "I think that's led to a loss of confidence from many investors as to whether the Fed gets it."
In more bad economic news for the market, the government said that consumer prices jumped a bigger-than-expected 0.8 percent in November, the sharpest climb in more than two years and driven by surging energy costs.
The Consumer Price Index, the most broadly used gauge of inflation, rose at the fastest rate since September 2005, as energy costs jumped a much higher-than-expected 5.7 percent, a Labor Department report said. Analysts polled by Reuters were expecting a 0.6 percent rise in the CPI.
On the plus side of the credit crunch, Citigroup shares rose even though it saw its debt rating cut by Moody's to "Aa3," citing concerns over capital ratios. The company said it plans to take $49 billion of structured investment vehicles onto its balance sheet in a bid to rescue the funds.
Citi shares initially dropped, but then turned around as investors continued the trend of rewarding institutions that have exposure to the subprime collapse who have come clean about their losses. Shares recovered after Goldman Sachs upgraded Citi's debt.
Another investment bank gained from the market turmoil. Goldman bet that securities backed by risky home loans would fall in value and that addednearly $4 billion to its bottom line for the year ended Nov. 30.
Moving the Market
One of the big gainers of the day was BioMarin Pharmaceutical , which surged to a seven-year high as analysts said the price of the company's newly-approved drug Kuvan is greater than expected may generate more revenue than previously believed.
Only six Dow components were showing moves to the upside in afternoon trading, Microsoft the leader among them.
On the downside, American International Group and JP Morgan Chase resumed their descent as financials continued to falter. Pfizer also turned sharply lower after questions were raised about the safety of its anti-smoking drug Champix.
On the Nasdaq, Rigel Pharmaceuticals continued to surge on an analyst upgrade.
Archer Daniels Midland was among the leading gainers in S&P 500 while struggling bond insurer MBIA weighed on the index.
Oil prices slumped on fears that a downturn in the economy could weigh on prices in 2008. Energy stocks felt the pinch, with losses coming at ExxonMobil, TotalSA, BP, ConocoPhillips and others.
Also, thedollarsurged, posting its largest daily increase against the euro in more than three years, after strong U.S. consumer price data trimmed expectations of aggressive rate cuts from the Federal Reserve.