Stocks dropped sharply on Thursday as data fueled worries the economy was weakening and bank shares tumbled on fears the European financial crisis could spread havoc to other parts of the world.

Factory activity in the U.S. Mid-Atlantic region plummeted in August, falling to the lowest level since March 2009.

While a Federal Reserve official said the Fed scrutinizes U.S. banks and the American units of European banks with equal care, a Wall Street Journal report said regulators are questioning the U.S. units of Europe's lenders more closely.

The selloff in stocks was broad, but sectors associated with growth were among the hardest hit. Top drags on the Dow included shares of IBM, down 5.4 percent at $162.17 and United Technologies, down 5.3 percent at $68.24. On the Nasdaq, shares of Oracle fell 8 percent to $25.28.

Europe is dealing with an escalating fiscal crisis, said Robert Van Batenburg, head of equity research at Louis Capital in New York.

In the United States the momentum is slip-sliding. You've got a lot of corporations that also came out with very worrisome comments that by the end of the quarter things really started to slow down.

The Dow Jones industrial average was down 398.82 points, or 3.50 percent, at 11,011.39. The Standard & Poor's 500 Index was down 44.64 points, or 3.74 percent, at 1,149.25. The Nasdaq Composite Index was down 103.93 points, or 4.14 percent, at 2,407.55.

Among banks, Citigroup Inc was off 7.2 percent at $27.71 and Morgan Stanley was down 5.7 percent at $16.04.

Among luxury retailers, shares of Tiffany & Co dropped 6.7 percent to $59.95.

The S&P 500 is down 15.7 percent since its April 29 highs and down 8.7 percent since the start of the year.

Another economic report that raised concern showed U.S. existing-home sales unexpectedly dropped in July, tempering hopes for a revival of economic recovery.

(Reporting by Caroline Valetkevitch, additional reporting by Rodrigo Campos)