Stocks fell across the board, with the beleaguered banking sector posting some of the steepest losses.
Investors retreated from Wall Street again, driven by worries about the nation's big banks and General Motors Corp.
Stocks slid to their lowest levels in more than 12 years Thursday, more than wiping out the previous session's rally. Investors wrestled with relentless uncertainty about the financial system and fresh concerns about GM. Short selling — bets that stocks will fall — ahead of the government's Friday employment report exacerbated the losses, slashing 281 points from the Dow Jones industrials and sending all the major indexes down more than 4 percent.
Stocks fell in every industry, with beleaguered banks posting some of the steepest drops. Citigroup Inc., still shaky despite receiving billions in government aid, at times sank below $1 and finished down 9.7 percent at $1.02. GM, meanwhile, ended with a loss of 15 percent at $1.86 as it warned of possible bankruptcy.
"Citigroup going below a buck today was a little scary," said Mark LeStrange, director of sales at Source Trading.
"To say that we're cheap here and it's a good value, it sounds right, but in all reality we could go 50 percent lower," he said. "Nobody has any idea how low we can go."
The Standard & Poor's 500 index is now down 56.4 percent from its peak in October 2007, making it the second worst slide for the index since its plunge of 86.2 percent from 1929-32.
The latest torrent of selling came ahead of the February Labor Department report that is likely to show hundreds of thousands of jobs were lost. Reports showing better-than-expected retail sales and factory orders Thursday weren't enough to stoke investor confidence.
Short sellers also dragged on the market, analysts said. Short sellers place bets that a stock will fall, and rising short positions on a stock can intensify its decline.
"Just go out, kill them. It's the easiest way to go out and make a buck," said Stephen A. Lieber, chief investment officer at Alpine Woods Capital Investors LLC in Purchase, N.Y., referring to short sellers.
The Dow fell 281.40, or 4.1 percent, to 6,594.44, its lowest close since April 1997.
Broader indicators also tumbled. The S&P 500 index dropped 30.32, or 4.3 percent, to 682.55, its lowest close since September 1996. The Nasdaq composite index fell 54.15, or 4 percent, to 1,299.59.
The Russell 2000 index of smaller companies fell 21.85, or 5.9 percent, to 349.45.
On the New York Stock Exchange, only 235 stocks advanced while 2,887 fell. Consolidated volume came to a heavy 7.28 billion shares compared with 7.51 billion shares traded Wednesday.
Robert Pavlik, chief market strategist at Banyan Partners LLC in New York, agreed that short selling is driving the market and that the drubbing is keeping away investors who would be attracted by prices of beaten down stocks.
"With all the uncertainty that has been created, long-term investors are not stepping in," he said. "What incentive do long-term investors have stepping in? Traders rule the roost."
Stocks fell initially after China deflated investors' hope that it would take new steps to stimulate its economy, but the discouraging economic data sent stocks even lower. The hope that China would unveil more government spending to help its economy was a major factor behind the market's bounce Wednesday, which sent the Dow Jones industrials up nearly 150 points after a five-day slide.
"It's been this continuous (cycle of) hope leads to disappointment," said Todd Salamone, senior vice president of research, Schaeffer's Investment Research in Cincinnati.
Investors have been wondering how much more the market can fall since the Dow and the S&P 500 index plowed through their November lows last week, dashing hopes that the market had indeed hit a bottom. At the same time, there is a contingent of investors with a "why sell now" mentality who are fearful of missing the next rally, Salamone said.
"A lot of people are banking we can't go much further, but if you look to the '30s, we could indeed go a lot lower," he said, referring to Wall Street's huge losses during the Great Depression.
Discouraged by little evidence that Washington's efforts to stabilize the economy are working, investors have lost faith in the administration, he said.
"At this point, you've got to be asking will anything help?" Salamone said. "The fact could very well be that the government can't do very much."
Among Thursday's gloomy reports, the Commerce Department said orders for manufactured goods fell by 1.9 percent during the first month of the year. While this was better than the 3.5 percent drop economists had expected, it marked a record sixth straight month of declines.
Data showing that initial unemployment claims fell more than anticipated last week failed to buoy stocks. Economists surveyed by Thomson Reuters/IFR predict the Labor Department will report that U.S. employers slashed 648,000 jobs in February — more than the 598,000 cut in January.
Rising unemployment is a big concern because it means many consumers have less to spend. And consumer spending, which accounts for more than two-thirds of U.S. economic activity, is crucial to helping the economy turn around. A handful of better-than-expected retail sales reports, including one from Wal-Mart Stores Inc., weren't enough to convince investors that consumer spending is improving.
Negative comments from Moody's Investors Service weighed on already depressed financial stocks. Concerns about capital levels led the ratings agency to downgrade the ratings of Bank of America Corp. and Wells Fargo & Co. Moody's also lowered the outlook on JPMorgan Chase & Co.'s ratings to negative. Bank of America dropped 42 cents, or 11.7 percent, to $3.17; Wells Fargo tumbled $1.54, or 15.9 percent, to $8.12; JPMorgan fell $2.70, or 14 percent, to $16.60.
The future of General Motors also plagued investors. The automaker said in its annual report that auditors raised serious doubt about its ability to continue operating. GM has already received $13.4 billion in federal loans, and is seeking a total of $30 billion from the government. GM dove 34 cents, or 15.5 percent, to $1.86.
Government bond prices rose as investors sought a safe haven. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.81 percent from 2.98 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, slipped to 0.20 percent from 0.25 percent Wednesday.
Gold prices advanced, even as the dollar rose against other major currencies.
Light, sweet crude fell $1.77 to settle at $43.61 a barrel on the New York Mercantile Exchange.
Overseas, Britain's FTSE 100 fell 3.2 percent, Germany's DAX index dropped 5 percent, and France's CAC-40 fell 4 percent. Earlier, Japan's Nikkei stock average rose 2 percent after Wall Street's Wednesday rally, but Hong Kong's Hang Seng index fell 1 percent.