Stocks fell sharply on Thursday, sending the S&P 500 index into correction territory on growing fears the euro-zone's handling of its sovereign debt crises could put the global economic recovery in jeopardy.

The inability of euro-zone leaders to agree on policy, highlighted by Germany's unilateral decision Tuesday to ban naked short-selling, has triggered worries about additional regulation and pressured the euro, which shed 0.9 percent versus the dollar.

Let's face it, it's tough to coordinate all those countries, reserve banks, different Feds, said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets in Cleveland.

You hear the cliche the markets hate uncertainty, and there is a whole hill of it over there right now.

The Dow Jones industrial average <.DJI> dropped 262.70 points, or 2.52 percent, to 10,181.67. The Standard & Poor's 500 Index <.SPX> lost 30.93 points, or 2.77 percent, to 1,084.12. The Nasdaq Composite Index <.IXIC> fell 72.64 points, or 3.16 percent, to 2,225.73.

May individual equity options and some options on stock indexes stop trading at Friday's close and expire on Saturday, which may increase volatility.

The Chicago Board Options Exchange Volatility index <.VIX>, often referred to as Wall Street's fear gauge, rose to its highest intraday level since April 2009.

The recent slide has dragged the S&P 500 index 11.1 percent lower from its 2010 closing high on April 23. A drop of 10 percent from the most recent high is widely considered to be a correction.

Banks and commodity related stocks were among the hardest hit, with the KBW Bank index <.BKX> losing 3.8 percent. The S&P Energy index <.GSPE> fell 3.6 percent.

Sears Holdings Corp tumbled 6.9 percent to $92.68 after the company said first-quarter profit slipped 38 percent, hit by weaker margins and slightly higher costs.

Labor Department data on Thursday showed the number of U.S. workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April, increasing by 25,000 to a seasonally adjusted 471,000 versus market expectations of 440,000.

The Conference Board said its index of leading economic indicators slipped 0.1 percent last month while factory activity in the U.S. Mid-Atlantic region accelerated less than expected in May.

(Editing by Padraic Cassidy)