Stocks ended near session lows as oil ended above $120 a barrel and two Dow components missed the Street's targets.
The Dow Jones Industrial Average shed 224.64, or 1.9 percent, to close at 11431.43. The S&P 500 lost 1.8 percent and the Nasdaq fell 1 percent.
AIG was the biggest drag on the Dow, falling 19 percent, after the insurer missed analyst expectations by a long shot. Wal-Mart added to the weight, falling 6.3 percent, after the discount retailer turned in disappointing same-store sales.
Oil ended three days of declines with a gusher. Light, sweet crude settled above $120 a barrel amid concerns about a pipeline that was attacked in Turkey.
Economic data came in mixed. Existing-home sales rose 5.3 percent in June, the highest reading since October, while initial jobless claims rose by 7,000 last week to 455,000, the highest level in more than 6 years.Consumer debt grew at the fastest rate in seven months.
Financial stocks led the decline, falling 5 percent, after a slew of disappointing news from the sector.
AIG reported aloss of 51 cents a share, falling far short of analysts' estimates, which had projected a profit for the company. Sales also missed estimates and the insurance giant said it will unveil a sweeping restructuring plan at a meeting on Sept. 25.
Citigroup skidded 6.2 percent after the bank said it would buy back more than $7 billion of illiquid auction-rate securities to settle charges that it misled investors about the debt's risk.
There was concern that Citigroup's move could put pressure on other big financial firms like UBS and Merrill Lynch to do the same.
American Express shares slipped 4.2 percent after Moody's warned that it might downgrade its credit ratingon the credit-card company.
July same-store sales were a disappointment -- even the numbers from the discount and teen retailers.
Wal-Mart's same-store sales rose 3 percent in July but fell short of the 3.4 percent expected.
Wal-Mart rival Target also missed its mark, reporting a decline of 1.2 percent when analysts had expected a more modest 0.3-percent drop.
Wal-Mart executives said the reason for the sales dropoff is that the money from the government stimulus checks is running out.
"With the end of the stimulus checks, we know consumers are spending more cautiously," said Eduardo Castro-Wright, head of Wal-Mart's U.S. operations.
Teen retailers, who are typically unfazed by downturns, started to show signs of wear. Pacific Sunwear said same-store sales fell 4 percent, hurt by weak sales of swimwear and accessories. Hot Topic sales fell 2.1 percent and Children's Place sales were flat.
Not surprisingly, department stores posted bigger-than-expected declines but J.C. Penney raised its second-quarter outlook, citing better-than-expected sales of reduced-price merchandise.
And bulk food and home goods continued to be a hit with shoppers: Wholesaler Costco reported itssame-store sales rose 10 percent, beating expectations.
In Europe, stocks skidded, led by banks amid concerns about the reach of the credit crunch. Asian stocks also finished lower.
Still to Come:
FRIDAY: Productivity; wholesale trade; Earnings from Berkshire Hathaway
Send comments to cindy.perman@nbcuni.com.
