Stocks fell on Thursday as signs of weakness in housing and investors' worries that authorities might be curbing stimulus efforts too soon sparked caution.
World central banks said they would scale back infusions of U.S. dollars into their banking systems, fueling unease triggered a day earlier when stocks sold off following the U.S. Federal Reserve's decision to slow purchases of mortgage debt.
That program has been one of the key pillars of the Fed's efforts to support mortgage lending.
Thursday's losses drove the benchmark S&P 500, which has rallied nearly 60 percent in six months from 12-year lows, to its worst two-day drop in three weeks as investors pummeled stocks across the board.
All 10 S&P 500 sectors fell, with materials, energy, financials and industrials faring the worst.
The housing number today probably threw some gasoline on the fire, said John Kosar, market technician and president of Asbury Research in Chicago. It's not only that the recovery is fragile, but the other important story is just how far the market has come, so fast. The Fed statement was a little bit sobering.
The Dow Jones industrial average <.DJI> dropped 41.11 points, or 0.42 percent, to 9,707.44. The Standard & Poor's 500 Index <.SPX> fell 10.09 points, or 0.95 percent, to 1,050.78. The Nasdaq Composite Index <.IXIC> slid 23.81 points, or 1.12 percent, to 2,107.61.
In disappointing news for the economy, The National Association of Realtors said sales of existing homes fell 2.7 percent to an annual rate of 5.10 million units, a drop that dented optimism about housing after four months of gains in home sales.
The Dow Jones U.S. Home Construction index <.DJUSHB> fell 2.4 percent. Among shares of major homebuilders D.R. Horton
With a market that has had such an explosive recovery from its lows, any kind of news that has people second-guessing the recovery will give people an excuse to sell, said Craig Peckham, equity trading strategist at Jefferies & Co in New York.
After the closing bell, investors were hit by more disappointing news. Research In Motion Ltd
RIM also gave an outlook that disappointed investors. Its stock ended regular trading down 3.2 percent.
Stocks had risen early after data showed a fall in the number of workers filing new claims for jobless benefits, but the gains were short-lived.
Shares of natural resources companies were weighed down by falling global commodity prices as the U.S. dollar rose. U.S. front-month crude fell 4.5 percent, or $3.08, to settle at $65.89 a barrel on the New York Mercantile Exchange.
Spot gold prices fell below $1,000 an ounce.
The S&P energy index <.GSPE> was down 1.3 percent, while the S&P materials index <.GSPM> dropped 2 percent.
Among financial stocks, JPMorgan
On Nasdaq, Electronic Arts
Volume was moderate, with about 1.37 billion shares changing hands on the New York Stock Exchange, compared with last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.60 billion shares traded, above last year's daily average of 2.28 billion.
Declining stocks outnumbered advancing ones by a ratio of about 7 to 2 on both the NYSE and Nasdaq.
(Editing by Kenneth Barry)