Stocks fell sharply on Thursday as another shoe dropped in the U.S. subprime mortgage sector meltdown, causing investors to flee riskier assets for the relative safety of government bonds.

Stocks added to their declines after the Wall Street Journal reported a second Goldman Sachs Group Inc. hedge fund was suffering losses and was selling its positions.

Sentiment was already poor following news overnight that France's biggest listed bank, BNP Paribas, froze 1.6 billion euros ($2.2 billion) worth of funds, citing fallout from the U.S. subprime sector.

Trading was extremely volatile, with stocks coming off their lows of the session shortly after the market opened following the New York Stock Exchange's imposing of trading curbs. The Nasdaq briefly turned positive, but was firmly back in negative territory by midday.

You're looking at the foundation of a marketplace that has imploded somewhat, Steve Goldman, market strategist, Weeden & Co. in Greenwich, Connecticut. We've had a snapback rally, but you tend to get some retest of the lows in the process. The market over the next month or so should be in a healing process, and it's time to wait for the dust to settle.

The Dow Jones industrial average was down 213.96 points, or 1.57 percent, at 13,443.90. The Standard & Poor's 500 Index was down 29.61 points, or 1.98 percent, at 1,467.88. The Nasdaq Composite Index was down 39.38 points, or 1.51 percent, at 2,573.60.

Investors fear that losses in the subprime mortgage sector would lead to tighter credit conditions and hurt corporate takeovers and share buybacks, two key forces behind the market's steady advance up until the recent turbulence.

Delinquencies have risen in the subprime arena, where borrowers with poor credit take out high-interest loans.

The European Central Bank injected funds into the banking system in an overnight tender to help calm jittery markets.

President George W. Bush said he had been told there is enough liquidity in the system to allow markets to correct. Earlier, the Bank of Canada later said it would provide liquidity to support the stability of the Canadian financial system.

Among financials, Goldman dropped 5.2 percent to $183.27 on the New York Stock Exchange. The Wall Street Journal had already reported on Thursday that the bank's internal hedge fund known as Global Alpha has lost about 16 percent for the year, citing people briefed on the matter. The fund has been the subject of persistent speculation for a couple of days.

Shares of Bear Stearns Cos. were down 5.3 percent to $114.67. Navigator Capital on Thursday filed a lawsuit against a Bear Stearns hedge fund, claiming Bear Stearns had neglected to manage the fund properly before the collapse.

The Philadelphia KBW Bank Index was down 3.7 percent.

A spate of disappointing monthly sales reports from major apparel retailers on Thursday also added to the negative tone.

Home improvement chain Home Depot said it was in talks that may change terms of a previously-agreed buyout of its supply division. Its stock fell 5.6 percent to $35.70 on the NYSE.

Before Thursday's losses, Wall Street had been on a three-day winning streak fueled in part by a Federal Reserve statement on Tuesday that the economy was likely to keep growing despite turmoil in credit markets.

The benchmark 10-year U.S. Treasury note yield dropped to 4.80 percent from 4.86 percent late on Wednesday as prices of government debt jumped.