Stocks extended their losing streak for a third straight day, setting the course to retest recent lows, as investor doubt about the effectiveness of government intervention seeped deeper into the market.
The Dow Jones Industrial Average shed 411.30, or 4.7 percent, to close at 8282.66. Twenty-nine of the 30 components finished lower; only General Motors advanced.
The Nasdaqdropped 5.2 percent to close at 1499.21, breaking through its recent low of 1505.90.
The S&P 500 index shed 5.2 percent to close at 852.30 -- four points shy of puncturing its Oct. 27 low of 848.92.
Adding to the already jittery mood, Paulson announced a major shift in the $700 billion rescue fund: That the government will back away from buying troubled mortgage assets from firms and use the money instead for a second round of capital injections into financial institutions that would match private funds.
General Motors was the only gainer on the Dow, rising 5.5 percent, amid expectations that auto makers will get government help. Ford advanced 2.2 percent.
The debate over whether government money should be used to help the auto sector continued to rage. House Speaker Nancy Pelosi said she would bring the House back in session next week to discuss the contentious issue.
There's some buzz in the market that insurers could beat auto makers to the punch and get a bailout first. Genworth shares , which have dropped to around $1 from $25 in May, rose sharply pre-market on this buzz but then fell 19 percent in regular trading.
Citigroup led the Dow decliners, falling 10.7 percent.
American Express was the second-biggest drag on the Dow, sliding 10.5 percent, piling on to Tuesday's nearly 7-percent drop after the credit-card provider received approval to become a bank-holding company.
Hedge-fund manager William Ackman told Reuters that GM should be restructured before it can receive any government cash. Other analysts say, if you bail out the auto makers, then where do you draw the line? Do you bail out Starbucks ?
Home values continued their downward spiral with their seventh consecutive quarterly decline, real estate Web site Zillow.com said.
Housing stocks continued to get hammered: Hovnanian and Lennar shed more than 12 percent.
Goldman Sachs continued its decline as the firm contemplates a new direction after the credit crisis.
Energy producers also were under pressure as oil prices held below $60 a barrel. Dow components ExxonMobil and Chevron shed more than 5 percent each.
Google shed 6.6 percent to close at $291, it's firs tclose below $300 since 2005.
Best Buy fell 8 percent after the discount retailer slashed its 2009 outlook because of the weak economy and intense pressure on consumers.
Macy's shed 11 percent after the department store reported a smaller-than-expected loss but warned that,if current trends continue, earnings will come in on the low end of its range.
For the first time in almost a quarter century, holiday sales are expected to drop. America's Research Group projects that sales will fall 1 percent this year.
>> Check out CNBC.com's Holiday Central blog, your one-stop shop for news on how the season is shaping up for retailers.
Asian stocks ended broadly lower and European stocks ended sharply lower.
Still to Come:
THURSDAY: Weekly mortgage applications; weekly jobless claims; international trade; Fed's Plosser, Stern speak; Treasury Budget; Earnings from Wal-Mart, Nordstrom, Kohl's
FRIDAY: Import/export prices; retail sales; business inventories; consumer sentiment; natural-gas inventories; Earnings from Abercrombie & Fitch, JCPenney
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