S&P 500 Index Closes Below January Low

Stocks fell sharply Thursday as concerns about more fallout from the credit crunch rattled the market.

The S&P 500 index closed below its January low of 1310. The S&P 500, Nasdaq and Russell 2000 all hit new 52-week lows.

The Dow Jones Industrial Average shed 1.8 percent, but still has some wiggle room before it gets to its January low of 12000.

The biggest causes for the sell-off were news that Thornburg Mortgage and a Carlyle Group bond fund missed margin calls, and a report that home foreclosures rose to a record level in the fourth quarter.

"Sentiment is overwhelmingly negative right now," Jim Iuorio, director of TJM Institutional Services, told CNBC, adding that the only thing that might budge the market is a solid jobs report on Friday.

Economists expect payrolls to increase by 25,000 and for the unemployment rate to tick up to 5 percent, according to a survey by Thomson's IFR Markets.

"What the market is going to need before it gets any conviction to the upside is liquidity," said Tom Schrader, managing director for U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore, which he expects will come from fiscal stimulus.

"We are starting to see some capitulation here," Malcom Polley, chief investment officer at Stewart Capital Advisors, told CNBC. "Even though there's fear left in the market, I think that that fear is an opportunity for people who have the cash and the ability to step in." Polley cited municipal bonds and agency securities among the buying opportunities.

The Mortgage Bankers Association said the proportion of mortgages that fell into foreclosure shot up to a record high in the fourth quarter. Meanwhile, the Federal Reserve said the percentage of equity most Americans have in their homes dropped below 50 percentfor the first time since the central bank started tracking this data in 1945.

In other economic news, the National Association of Realtors reported that existing-home sales were unchanged in January from December, though still down about 20 percent from a year earlier. Jobless claims fell more than expected last week.

More Shoes Drop in Financial Sector

Financials led the decline, with the S&P financial index shedding 3.2 percent, following news of more shoes dropping in the sector.

Thornburg Mortgage , which provides "jumbo" mortgages for high-end homes, said it had received a notice of defaultfrom J.P. Morgan Chase for failing to meet a margin call of about $28 million, spurring concern that it might have to file for bankruptcy.

Carlyle Capital Corp., a European affiliate of Carlyle Group that invests in mortgage-backed securities issued by Fannie Mae and Freddie Mac, also said that it had received a notice of default as it couldn't meet some margin calls.

As a result, several mortgage REITs, including Anworth Mortgage Asset Corp., dropped more than 20 percent and were among the biggest percentage decliners on the New York Stock Exchange.

"The real story in financials today is we're all focused on the car crash on the side of the road -- the banks that are writing off big numbers," Doug Sandler, chief equity strategist at Wachovia Securities, told CNBC. "What we're not looking at is the companies that are reliant on healthy lending environments." It's not banks the market should be worried about, it's REITs, Sandler said.

Shares of Fannie and Freddie fell to their lowest levels in more than a decade.

Merrill Lynch said on Wednesday it was quitting the subprime-lending businessbecause of the deteriorating market for home loans, firing 650 employees in that business, which it bought in December 2006 for $1.3 billion.

Citigroup said it's scaling back its residential-mortgage businessafter more than $20 billion in write-downs and what some analysts say could be another $15 billion to come.

Standard & Poor's cut its credit rating on Washington Mutual to "BBB" from "BBB+," saying the regional bank chain, based in Seattle, faces steeper losses on bad loans that previously expected. Bear Stearns said it now expects Washington Mutual to report a loss of 90 cents a share for 2008, down from its earlier estimate of 15 cents a share.

Investors were also disappointed that the plan for bond insurer Ambac, announced Wednesday, called for raising $1.5 billion in capital, not a bigger bank-led bailout.

Goldman Sachs cut its price target on Ambac, as well as competitor MBIA, saying that Ambac's capital plan falls $1 billion short of what the bond insurer needs.

Elsewhere in the market, the dollar hit another record low against the euro, which traded above $1.53, and oil closed above $105 a barrel.

Both the European Central Bank and the Bank of England left their respective interest rates unchanged.

Financials were the day's biggest decliners in the S&P's top 10 sector indexes, followed by energy and consumer-discretionary stocks.

Airline stocks skidded again as deal speculation quiets down and oil prices soar. American parent AMR and Continental were among the sector's biggest decliners.

Discounters Ring Up Sales

Retail-sales results were decent, defying analysts' expectations that this would be the the worst February in about five years. According to Thomson Financial, 60 percent of retailers have topped estimates, while 40 percent have fallen short.

However, if you look closer at how consumers were spending, it's a little more worrisome: They were using gift cards to pay for groceries and spending around the time they received their paychecks, CNBC's Margaret Brennan pointed out.

Discounters turned in solid numbers as consumers tend to focus on bargains and staples in times of downturns.

Wal-Mart, the only Dow stock to close higher, said its February same-store sales rose 2.6 percent, far above analyst estimates of 1.1 percent, as consumers bought groceries and other staples but also discretionary items. Wal-Mart said sales of food, flat-panel TVs, digital-audio products, video games, pharmacy items and Valentine's Day seasonal merchandise were all solid.

Warehouse clubs Costco and BJ's also reported stronger-than-expected sales.

Wal-Mart rival Target , which is a discounter but with a more trendy, upscale edge, said it expects same-store sales to fall slightly in March, then start to climb in April.

Clothing retailers are already in a recession, according to Piper Jaffray retail analyst Jeffrey Klinefelter.

J.C. Penney said same-store sales fell 6.7 percent, while Kohl's sales fell 3.8 percent. Gap , which runs Gap, Banana Republic and Old Navy stores, reported such sales dropped 6 percent, more sharply than analysts had expected.

Even teen retailers and high-end department stores started to show some cracks.

Abercrombie & Fitch , American Eagle and Nordstrom all posted declines. Though, teen retailer Aeropostale and upscale department store Saks continued to post gains in same-store sales.

Investors continued to sell off shares of Macy's , which recently decided to stop issuing monthly same-store sales reports. The stock is already down more than 40 percent in the past year.

Oracle was one of the biggest gainers on both the Nasdaq and in the S&P 500 index after Merrill Lynch raised its rating on the stock to "buy" from "neutral."

Blockbuster reported a better-than-expected earnings and said its restructuring efforts -- including cost reductions and job cuts -- will propel it to a fulll-year profit. Excluding severance costs and other one-time items, the video-rental chain earned 26 cents a share, better than the 19 cents a share predicted by analysts surveyed by Reuters.

H&R Block advanced after the largest U.S. tax preparer reported its quarterly loss narrowed as tax-return revenue offset costs related to job cuts and the closing of a subprime-mortgage unit.

Send comments to cindy.perman@nbcuni.com.