Stocks slid sharply on Friday after Bear Stearns said credit markets were in their worst shape in two decades, while jobs data aroused further concerns about weakness in the economy.
Bear Stearns Cos. stock fell 6 percent after the comments from its chief financial officer, which exacerbated mortgage jitters and drove the three major indexes down more than 2 percent in a broad market sell-off.
Earlier, Standard & Poor's lowered its outlook on Bear Stearns' debt to negative, saying the biggest U.S. underwriter of mortgage bonds may have problems, including with its hedge funds, that could hurt the firm for an extended period.
It's particularly ugly right now, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
The Bear Stearns comments are what really pushed the market over the edge.
The Dow Jones industrial average tumbled 281.42 points, or 2.09 percent, to 13,181.91, with every one of its 30 components ending the day in the red.
The S&P 500 and the Nasdaq had their worst one-day percentage drops since the February 27 global equity rout.
The Standard & Poor's 500 Index dropped 39.14 points, or 2.66 percent, to 1,433.06. The Nasdaq Composite Index sank 64.73 points, or 2.51 percent, to 2,511.25.
The sharp declines prompted the New York Stock Exchange to institute downside trading curbs at 3:29 p.m. (1929 GMT).
The day's sell-off ended a week of wild market swings, pushing all indexes firmly down into negative territory for the week -- the Dow fell 0.7 percent, while the S&P 500 shed 1.8 percent and the Nasdaq lost 2 percent.
U.S. crude oil futures ended more than a dollar lower, sparking worries in energy markets that petroleum demand might drop as the economy slows. On the New York Mercantile Exchange, September crude fell $1.38, or 1.8 percent, to settle at $75.48 a barrel.
U.S. government bond prices climbed, as falling stocks sent jittery investors scrambling for the safety of Treasury debt, bond traders and fund managers said. The 10-year U.S. Treasury note jumped 23/32 in price to 98-19/32, while its yield fell to 4.68 percent from 4.77 percent late on Thursday.
The CBOE Volatility Index, or VIX, which is known as Wall Street's fear gauge, jumped 18.6 percent to end at 25.16. It was the seventh trading session that the VIX rose above 20.
Wall Street has been dogged by concerns that deteriorating lending conditions could hurt the economy and a rash of disappointing economic data, including weaker-than-expected jobs growth and slower service sector growth, added to already frayed nerves.
U.S. employers expanded their payrolls in July at the slowest pace since February, adding only 92,000 jobs, and the unemployment rate rose to 4.6 percent, its highest level since the start of the year, a government report showed on Friday.
In another sign of malaise in the economy, the Institute for Supply Management said its index for the service sector was 55.8 in July, reflecting a much slower pace of growth than June's reading of 60.7. Any reading over 50 indicates growth.
Problems in the housing sector, where lenders are encountering difficulties with rising mortgage defaults and prices are declining in many metro markets, appeared to spread into hiring as construction businesses cut jobs.
NO EASY CREDIT
Bear Stearns stock, which had already slid 24 percent over the past three months, fell as low as $106.55, its lowest since November 2005, before recouping some of its losses by the close. Bear Stearns ended at $108.35, down 6.3 percent on the New York Stock Exchange.
Bear Stearns has struggled with three hedge funds that ran into trouble because of high-risk mortgage investments gone awry.
On Friday, Bear Stearns Chief Financial Officer Sam Molinaro said bond market turmoil sending investors fleeing from risk may be a worse predicament than the 1987 stock market crash and the bursting of the Internet bubble in 2000.
At its session low, the stock of Bear Stearns suffered its biggest percentage drop since September 17, 2001, the first day of trading after the attacks that destroyed the World Trade Center's twin towers in New York.
Financial shares had already been dragging on the market, after the latest signs mortgage market distress, American Home Mortgage Investment Corp. announced plans to close most operations on Friday and lay off nearly 7,000 employees..
Worries about credit also extended to credit card companies on the theory that consumers struggling with mortgage payments would also fall behind on credit card debt. American Express shares fell 5.6 percent to $57.49, while MasterCard dropped 8 percent to $131.26.
Shares of Network Appliance Inc. fell 20 percent to $22.97 on the Nasdaq, after the data storage network equipment maker said revenue fell more than its previous pessimistic forecast amid slower spending by large customers in the United States and Europe.
Trading was active on the NYSE, with about 2.12 billion shares changing hands, well above last year's estimated daily average of 1.84 billion, while on Nasdaq, about 2.51 billion shares traded, also surging ahead of last year's daily average of 2.02 billion.
Declining stocks outnumbered advancing ones by a ratio of about 5 to 1 on the NYSE and by about 4 to 1 on Nasdaq.
(Additional reporting by Ellis Mnyandu and Caroline Valetkevitch)