U.S. stocks fell sharply on Tuesday amid various reports pointing to further weakening in the economy. A drop in home sales, reduced consumer spending at AT&T and rumors of a possible bankruptcy at leading mortgage lender Countrywide Financial contributed to a nearly 2 percent drop in the benchmark Dow Jones Industrial Average.

The Dow Jones Industrial Average closed down 238.42 points, or 1.86 percent at 12,589.07. The technology heavy Nasdaq Composite Index fell 58.95 points, or 2.36 percent, to 2,440.51. The Standard & Poor's 500 Index sank 58.95 points, or 2.36 percent, to 2,440.51.

AT&T Chief Executive Officer Randall Stephenson said the phone company is facing softness in its home phone and Internet businesses. AT&T shares plunged 4.56 percent, or $1.87 to $39.16 on the New York Stock Exchange.

Countrywide Financial, the largest U.S. mortgage lender denied rumors that it would enter into bankruptcy. Rumors spread earlier in the day that it needed additional cash to continue operating its business. Shares of Countrywide fell 28.4 percent, or $2.17 to end at $5.47.

The housing market also continued to show signs of a downturn as contracts to sell existing homes dropped in November. The National Association of Realtors' Pending Home Sales Index fell 2.6 percent to 87.6 after two months of small gains. The realtors group restated its outlook for 2008, saying it does not expect even a modest increase in home prices as previously announced.

KB Homes, one of the nation's largest home builders, reported today that its quarterly loss increased amid ongoing market woes. It posted a loss of $772.7 million compared with a loss of $49.6 million in the year-ago quarter. KB Homes shares were down $1.70, or 9.2 percent to $16.78.

Also, Federal Reserve Bank of Boston President Eric Rosengren said Tuesday that lower residential housing investment raised the risk of a greater downturn in the overall economy. He did not say whether the Fed should raise or lower interest rates as a way of boosting the economy.