Stocks cascaded to their lowest close since February on Friday after May's jobs figure slammed investors already reeling from worry over another developing debt crisis, this time in Hungary.
Data showed the U.S. economy added fewer-than-expected jobs last month, with a large portion of those being temporary hirings for the U.S. Census. Investors rapidly reversed bets made during the week as expectations for a blowout number grew, leading up to the report.
Wall Street, which is down 12.5 percent since the April 23 closing high for the year, sold off broadly, led by economically sensitive sectors, including industrials, technology and small-caps, on concerns that the economy will recover by fits and starts.
It was extremely disappointing, said Robert Froehlich, senior managing director of The Hartford Mutual Funds in Simsbury, Connecticut.
We know that employment is the lagging indicator, but ... we've been saying that for a year. There comes a time where we're really going to have to see that number pick up.
The drop in stocks follows Wall Street's first back-to-back advances since late April. Worries that Europe's sovereign debt troubles could spread flared again after a Hungarian official said the country was at risk of a Greek-style crisis, driving the euro to a more than four-year low against the dollar.
The Dow Jones industrial average <.DJI> dropped 323.31 points, or 3.15 percent, to 9,931.97. The Standard & Poor's 500 Index <.SPX> lost 37.95 points, or 3.44 percent, to 1,064.88. The Nasdaq Composite Index <.IXIC> tumbled 83.86 points, or 3.64 percent, to 2,219.17.
The CBOE Volatility Index or VIX <.VIX>, Wall Street's favorite barometer of investor fear, shot up 20.43 percent to 35.48.
The new worry over Hungary is rekindling sovereign debt issues. The additional uncertainty is naturally lighting a fire beneath the VIX as premiums on options boost volatility, said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.
Large manufacturers were among the Dow's biggest losers, with manufacturer Caterpillar Inc sliding 5.5 percent to $57.76, and conglomerate United Technologies Corp dropping 4 percent to $65.13.
For the week, the Dow lost 2 percent, the S&P 500 fell 2.3 percent, and the Nasdaq shed 1.7 percent.
Financial stocks also ranked among the worst performers, with the KBW Banks index <.BKX> down 4.4 percent. JPMorgan Chase & Co slid 3.5 percent to $37.75, while Bank of America Corp fell 2.9 percent to $15.35.
Decliners carried the day handily, outnumbering advancers on the New York Stock Exchange by a ratio of more than 9 to 1, while on the Nasdaq, nearly eight stocks fell for every one that rose.
Further exacerbating the pressure on Wall Street were concerns from Europe about Societe Generale's derivatives business. The company said it would not comment on market talk about the bank's derivatives operations.
The Labor Department said the U.S. economy added 431,000 jobs in May -- far short of the 513,000 that Wall Street had expected. The unemployment rate dropped to 9.7 percent in May from 9.9 percent in April.
Even so, analysts said it didn't alter their view that the economy is stabilizing, although gradually, with many expecting unemployment will remain high for some time.
We interpret it that this is confirmation that we are not going to have a V-shaped type recovery, but are in a below- average recovery, said Hank Smith, chief investment officer of Haverford Trust Co. in Philadelphia.
We think it will morph into a sustainable expansion, albeit below average.
The S&P 500 fell below 1,070, which had been considered a support level for the market. The index closed just below the intraday low the market reached during the so-called flash crash on May 6.
BP Plc began capturing some oil spewing from the ruptured oil well in the Gulf of Mexico. The company also put off a decision on whether to pay its next quarterly dividend as some politicians have demanded. BP's U.S.-listed shares fell 5.3 percent to $37.16.
(Reporting by Leah Schnurr; Additional reporting by Doris Frankel in Chicago; Editing by Jan Paschal)