Stocks fell sharply at the opening bell Thursday as oil clawed back some gains and a report showed jobless claims unexpectedly rose last week.
Initial jobless claims rose by 15,000 last week, snapping a three-week declining streak. Economists had expected claims to hold steady.
This followed a report from ADP payroll service that private employers cut 33,000 jobs from their payrolls in August. That was just slightly more than the 30,000 drop economists had expected.
The employment reports are closely watched ahead of August jobs report, due out on Friday. Economists expect to see nonfarm payrolls shrink by 75,000.
Upticks in service-sector activity and U.S. worker productivity, good signs for U.S. companies amid the economic slump, did little to console the market.
The ISM gauge of service-sector activity rose to 50.6 in August, just tip-toeing across the line into expansion territory. Anything below 50 indicates contraction. Economists had expected the measure to hold steady at 49.5.
Productivity surged in the second quarter to a revised annual rate of 4.3 percent, much stronger than the 3.5 percent economists had expected, and nearly double the 2.2 percent gain the Labor Department had initially estimated for the quarter. Unit labor costs contracted by 0.5 percent.
Crude oil continued to trade below $110 a barrel but flattened out after an earlier rise. US inventory data is due out at 10.35 am ET and hurricane watch continues with Hanna and Ike looming on the horizon.
Investors were also closely watching retailers as August same-store sales reports trickled out.
Wal-Mart hit it out of the parkfor the back-to-school season, reporting same-store sales rose 3 percent, about double what analysts had expected.
Wal-Mart shares rose 1.5 percent, making it the top gainer on the Dow.
Department stores including JCPenney and Kohl's reported sales fell but beat expectations.
But there were misses across the board, from luxury retailers to teen retailers -- even wholesale warehouse club Costco .
The outlook for the economy took a further knock on Wednesday as the Federal Reserve's Beige Book, which gives a snapshot of business conditions, showed high prices and slowing growth are dragging on consumer and business morale.
Weakness in consumer sentiment is holding the stock market back, according to Walter Prendergast, president of Paradigm Capital Management. "We're going to be in a sideways trading market for the next several months," he told "Worldwide Exchange."
Speculation over the future of Lehman Brothers continued to mount, with the UK bank HSBC being tagged as a possible bidder. However, Mitsubishi UFJ Financial Group rejected a media report that it was considering taking a stake in the troubled investment bank. A day earlier, there were reports that the much-talked about possibility of a Korean bank buying into Lehman was on thin ice.
Meanwhile in Europe, both the Bank of England and European Central Bank are due to deliver interest-rate decisions and both are expected to hold, despite the prospect of weakening economic growth.
MONDAY-THURSDAY: Republican National Convention
THURSDAY: Retailers' same-store sales; Monster employment report; jobless claims; productivity; ISM services index; Fed's Yellen speaks; Earnings from Toll Brothers; McCain speaks at GOP convention
FRIDAY: August jobs report; earnings from Nat Semi
Send comments to firstname.lastname@example.org.