Stocks erased the year's gains in the broadest selloff in a month-and-a-half on Wednesday as fears of sustained global economic stagnation caused investors to flee to safer assets.

All three major indexes posted their worst percentage drop since July 16 following the Federal Reserve's bleaker assessment of the economy on Tuesday. The U.S. central bank said it would take steps to hold down borrowing costs. However, some traders questioned how effective these measures would be.

Adding liquidity to the system by saying they would buy Treasuries isn't helping the average man on the street, said Robert Pavlik, chief market strategist at Banyan Partners LLC in New York. This isn't going to be creating jobs or helping the housing market.

There were more than five times as many declining stocks as advancing ones on the New York Stock Exchange while on the Nasdaq, more than eight stocks fell for each that rose.

Only five of the S&P's 500 stocks ended higher. All 10 major S&P sectors were down more than 1 percent, led lower by the industrials <.GSPI>, down 3.9 percent, and the financials <.GSPF>, off 3.6 percent. Diversified manufacturer 3M Co was the biggest drag on the Dow, off 3.5 percent.

A report on soft factory data in China added to the worries about a global slowdown, pressuring equities and commodities and lifting the prices of Treasuries. The two-year note's yield fell to an all-time low overnight.

Some market participants had hoped Asia would bail us out of our dilemma, said Len Blum, managing partner at Westwood Capital LLC in New York. If China isn't growing fast, then we can't hitch our wagon to that star, which will hurt commodities and stocks while people flee to the dollar.

The Dow Jones industrial average <.DJI> was down 265.42 points, or 2.49 percent, at 10,378.83. The Standard & Poor's 500 Index <.SPX> was down 31.59 points, or 2.82 percent, at 1,089.47. The Nasdaq Composite Index <.IXIC> was down 68.54 points, or 3.01 percent, at 2,208.63.

The Nasdaq was down 2.7 percent for the year, while the S&P 500 was down 2.3 percent and the Dow was down 0.5 percent. The CBOE Volatility Index <.VIX> surged 13 percent, suggesting investors see further choppiness in the market.

Among the Nasdaq's top decliners was Cisco Systems Inc , which fell 2 percent to $23.73 during the session, then slumped a further 7.9 percent to $21.85 in extended trading after the company reported weaker-than-expected revenues.

John Chambers, the chief executive, said that while supply chain constraints were improving, challenges remained. He also affirmed the company's long-term annual revenue growth target of 12 percent to 17 percent.

Pressured by Cisco, the stock market selloff was expected to continue into Thursday's session. S&P 500 futures were down 0.8 percent and Nasdaq futures fell 1.2 percent.

Semiconductor company Cree Inc fell 13 percent to $59.81 a day after it gave a revenue outlook for the current quarter below analyst estimates.

Macy's Inc was a rare bit of positive news, rising 5.9 percent to $20.52 after it reported second-quarter earnings that beat expectations and forecast strong full-year same-store sales growth.

Dow component Walt Disney Co fell 3 percent to $34.22 despite reporting better-than-expected third-quarter earnings and revenue late on Tuesday.

After briefly piercing its July upward trendline on Tuesday, the S&P 500 traded below it during Wednesday's session and opened the door to testing the July 30 low of 1,088, which provided support.

A breach of that 1,088 level takes near-term support down to 1,057, the July 20 low and roughly 3 percent below the benchmark's current level.

Volume was light, with about 8.52 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's estimated daily average of 9.65 billion.

(Reporting by Ryan Vlastelica; Additional reporting by Rodrigo Campos; Editing by Kenneth Barry)

China Down