Stocks plunged after the sharpest jump in the unemployment rate in more than 20 years and news that wholesale inventories ballooned. Oil jumped more than $6 a barrel.
The Dow Jones Industrial Average fell more than 100 points, or 1 percent, in the first minute of trading, and was down nearly 300 points within the first two hours of trading.
Stocks fell further after news that wholesale inventories grew by 1.3 percentin April, well above the 0.5 percent expected and the revised 0.1-percent increase recorded for March. The inventory gain was attributed to the largest increase in petroleum stocks in more than two years.
Energy stocks were the bright spot in a sea of red, with Chevron the lone star rising on the Dow.
The employment report showed that U.S. employers cut jobs for a fifth straight month. Nonfarm payrolls shed 49,000 jobsin May, better than the 58,000-decline expected. April was revised to show 8,000 more job losses than previously expected. The unemployment rate shot up to 5.5 percent from 5 percent in April, the biggest monthly jump since 1986.
“I’ve been trading these markets for 25 years; to see a jump like this is a little scary,” Jack Bouroudjian of Brewer Investment Group told CNBC. "But, these markets have already factored in that weakness.”
The market's initial knee-jerk was a sharp sell-off but economists pointed out that the historically high jump in the unemployment rate was likely a statistical fluke.
"These figures should be taken with a grain of salt as school-leavers probably skewed them this month," Joshua Shapiro, chief U.S. economist at MFR Inc. wrote in a note to clients.
In addition to new graduates, there was also historically high unemployment among teenagers, notes Tony Crescenzi of Miller Tabak. The increase in both demographics "almost certainly reflects difficulties adjusting for the many variables associated with the ending of the school year, changing demographics, and the timing of the jobs survey, Crescenzi said. "It is therefore likely that some of the month's increase in the unemployment rate will be reversed."
Still, the report "is further evidence of the increasing pressure on consumer spending, which is likely to revert to a very weak trend after the temporary benefit of tax rebates fades," Shapiro said.
Bouroudjian, meanwhile, is more worked up about comments Thursday from European Central Bank resident Jean-Claude Trichet that the central bank may raise a key European interest rate at its next meeting in July to tame inflation.
"Trichet’s comments -- these arrogant comments -- were unbelievable," Bouroudjian said. "He is not moving the ball, he is creating a new game."
Trichet's warning shot continued to depress the dollar and fuel another relentless ascent in oil prices , which shot up $6 a barrel to more than $134 a barrel. Adding to the pressure on oil prices were remarks from Israel's transport minister that an attack on Iranian nuclear sites appears "unavoidable" and a Morgan Stanley note that oil could hit $150 by the Fourth of July.
National Semiconductor shares jumped about 7 percent -- a rare feat on this landslide day -- after the chip maker reported a lower quarterly profit but blew past revenue expectations amid higher profit margins on its chips.
"Business conditions improved in the quarter and we were able to turn this into higher gross margins," CEO Brian Halla said in a statement.
Intel tumbled amid news that the chip maker is under investigation by the FTCfor antitrust violations.
In the financial sector, the Securities and Exchange Commission is investigating whether American International Group overstated the value of contracts linked to subprime mortgages, people familiar with the matter told the Wall Street Journal.
Executives at Lehman Brothers are mulling a pre-announcement of the firm's second-quarter results in an effort to dispel market rumors that it is facing a liquidity crisis, people close to the investment bank told CNBC.
Lehman has traditionally released its earnings for the second quarter during the week of June 16, which is in two weeks. But people close to the company said executives are considering whether to move those earnings up, possibly to next week, when earnings are also expected from Morgan Stanley and Goldman Sachs .
On the Micro-hoo front, Carl Icahn sent yet another letter to Yahoo , trying to get Internet portal to agree to a deal with Microsoft . Icahn said Yahoo should pitch a $34.375-a-share price tag to Microsoft and if the software giant doesn't accept the offer in a "friendly and cooperative" manner, he would push for a Yahoo deal with Google .
Yahoo's shareholders don't meet until August 1, so this could go on for quite a while.
Still to Come:
FRIDAY: consumer credit; Fed's Evans, Bullard speak; Wal-Mart shareholders meeting
Send comments to cindy.perman@nbcuni.com.