Stocks dropped more than 2 percent on Wednesday as worse-than-expected Chinese factory data and a weaker outlook from the Federal Reserve added to worries about the economic recovery.

The S&P 500 once again fell into negative territory for the year, with the S&P materials index <.GSPM> down more than 3 percent and an index of semiconductors <.SOXX> tumbling 4.3 percent.

A volatility index was up sharply, suggesting investors see further choppiness in the market.

On Tuesday the Federal Reserve downgraded its outlook on the economy, and said it would begin funneling proceeds from maturing mortgage bonds it holds into longer-term government debt to keep borrowing costs low.

The Fed's assessment of the economy highlighted growth worries.

Maybe the Fed made investors realize the economy is growing at an anemic pace at best, said Alan Lancz, president, Alan B. Lancz & Associates Inc., an investment advisory firm, based in Toledo, Ohio.

The Dow Jones industrial average <.DJI> was down 226.06 points, or 2.12 percent, at 10,418.19. The Standard & Poor's 500 Index <.SPX> was down 28.53 points, or 2.54 percent, at 1,092.53, and was down 2 percent for the year. The Nasdaq Composite Index <.IXIC> was down 65.74 points, or 2.89 percent, at 2,211.43.

China reported a slowdown in factory output, adding to the picture of softening domestic demand painted by other data a day earlier that showed a sharp drop in import growth.

Among top decliners was Cisco Systems , which is due to report earnings after the bell. The stock was down 2.8 percent to $23.64.

According to Goldman Sachs derivatives strategists, options are pricing in a 5 percent earnings day move, but (Cisco) shares have a median realized earnings-day move of less than plus or minus 3 percent over the past eight quarters.

Results are expected to be in line, and shareholders should consider selling Cisco's August $24 straddles to monetize high options prices, they said.

While stocks were falling, a market volatility index <.VIX> was up 16.3 percent.

In what some chartists see as a sell signal, the S&P 500's moving average convergence-divergence or MACD line dipped below its signal line. At the same time, momentum dropped to just below its zero line, strengthening the bearish alert.

Near-term support is found at 1,088, the July 30, intraday low, and then at 1,057, the July 20 low.

Losses in defensive stocks such as utilities, where dividend yields often look attractive in a weaker economic environment, were less than in other sectors.

U.S. Treasury debt prices rose, with benchmark yields hovering at 16-month lows.

(Reporting by Caroline Valetkevitch; Additional reporting by Angela Moon and Rodrigo Campos in New York and Doris Frankel in Chicago; Editing by Kenneth Barry)