U.S. stocks slid on Thursday, hit by a warning from General Motors about possible bankruptcy and persistent worries about major banks.

A spate of grim economic reports signaling more fallout from the recession added to the negative tone as major indexes traded around 12-year lows. Reports of anemic monthly sales from some major U.S. retailers increased the gloom while GM shares slid about 17 percent.

Worries about the financial system's health hit bank stocks again as investors focused on the possibility that the troubles of the embattled finance arm of General Electric could lead to a ratings downgrade for the entire company.

GE's stock was up 1.5 percent at $6.79, but the exposure to General Electric throughout the U.S. banking system remains a significant concern.

Bank shares fell, with JP Morgan Chase & Co down 8.8 percent at $17.60. Bank of America lost 10.6 percent at $3.21, and the U.S.-listed stock of Barclays Plc sank almost 26 percent to $3.71 on the New York Stock Exchange.

Citigroup shares fell below $1, trading as low as 97 cents on the NYSE. The S&P index of financial stocks <.GSPF> was down 8 percent.

Clearly the concern about the financial system and the banking system are weighing very heavily and one wonders if any bank will be paying dividends, let alone the larger banks, said Henry Smith, chief investment officer of Haverford Trust Co in Philadelphia.

The Dow Jones industrial average <.DJI> fell 221.74 points, or 3.22 percent, to 6,654.10. The Standard & Poor's 500 Index <.SPX> dipped 26.15 points, or 3.67 percent, to 686.72. The Nasdaq Composite Index <.IXIC> edged lower 41.12 points, or 3.04 percent, to 1,312.62.

Shares of embattled automaker GM fell 16.8 percent to $1.83 after it said there were substantial doubts about its ability to continue as a going concern.

GM said if it was unable to successfully reorganize and if debtor-in-possession financing was unavailable, it would be forced to liquidate under Chapter 7 of the U.S. bankruptcy code.

Investors worry that GM's demise would send shock waves through the already battered U.S. economy, given that it is a major employer and buyer of supplies from auto parts makers.

Among other drags were shares of big manufacturers like 3M Co , off 4.2 at $42.94, after a brokerage cut its price target on the stock, and Caterpillar Inc , down 7.7 percent at $23.47.

Economic news included a report that showed new orders received by U.S. factories fell for a sixth straight month in January.

The Mortgage Bankers Association said on Thursday that one in every eight U.S. households, a record share, ended 2008 behind on their mortgage payments or in foreclosure as job losses intensified a housing crisis created by lax lending practices. The Dow Jones index of home builders' shares <.DJUSHB> was down 4.5 percent.

(Additional reporting by Leah Schnurr, Editing by Jan Paschal)