Stocks slid on Thursday with the Dow and S&P falling to 12-year lows as General Motors' warning of possible bankruptcy and concerns about the banking system's fate reinforced investors' reluctance to take on risk.

The previous session's rally proved fleeting as worries about the financial system's health hit bank stocks again and investors focused on the possibility that troubles in the finance arm of widely held General Electric could lead to a debt rating downgrade for the entire company.

GE's stock was down 0.5 percent at $6.66 after falling to its lowest since 1991 a day earlier. Uncertainty about the exposure of U.S. banks to GE remained a significant concern and the S&P financial index fell nearly 10 percent.

Shares of Citigroup, once the world's largest bank by market value, fell as low as 97 cents during the session, trading below $1 for the first time. Anxiety rose over whether the bank can be restored to health or whether it will have to be taken over by the government.

The loss of confidence is pervasive. There isn't any magic bullet here that's going to save Citi or Bank of America. The only thing that might save them is if the government comes in and sponsors a bankruptcy, said John Schloegel, a vice president of Capital Cities Asset Management in Austin, Texas.

The Dow Jones industrial average fell 281.40 points, or 4.09 percent, to 6,594.44. The Standard & Poor's 500 Index lost 30.32 points, or 4.25 percent, to 682.55. The Nasdaq Composite Index dropped 54.15 points, or 4.00 percent, to 1,299.59.

General Motors shed 15.5 percent to $1.86 after its auditors raised substantial doubt about the automaker's viability if it fails to head off losses and stop burning through cash.

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

The Nasdaq closed at its lowest level since March 2003, a month remembered for the beginning of the Iraq war. Both the Dow and S&P 500 are down more than 24 percent for the year so far, with the broad S&P shedding 56 percent from 2007's all-time high. U.S. stocks have lost around $11 trillion in value since hitting all-time highs in October 2007.

Indexes more than gave back Wednesday's rally, which was spurred by news of a Chinese economic stimulus plan. But those hopes were dashed on Thursday morning when Premier Wen Jiabao, speaking to parliament, did not announce any expansion of China's stimulus package.

Moody's Investor Service said on Wednesday it may cut its ratings on Wells Fargo and Bank of America, helping drive Wells Fargo down 15.94 percent to $8.12 and pushing Bank of America down 11.7 percent to $3.17.

Citigroup's stock closed at $1.02, down 11 cents, or off 9.7 percent for the day in NYSE trading.

Exxon Mobil was the Dow's biggest drag, dropping 5.3 percent to $62.22 as U.S. front-month crude lost $1.77 to settle at $43.61 a barrel, pressured by deteriorating global economic prospects.

On the upside, shares of Wal-Mart added 2.6 percent to $49.75 after the world's largest retailer posted solid monthly sales and raised its annual dividend.

Grim economic reports signaling more fallout from the recession added to the negative tone ahead of Friday's key non-farm payrolls report. Data is expected to show the economy shed 648,000 jobs last month, while the unemployment rate is expected to rise to 7.9 percent, according to a Reuters poll of economists.

Indeed, the White House said that it doesn't expect to see good news out of the jobs report.

A report on Thursday showed new orders received by U.S. factories fell for a sixth straight month in January. The Mortgage Bankers Association said that one in every eight U.S. households with mortgages, a record share, ended 2008 behind on their payments or in foreclosure.

(Editing by Jan Paschal)

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