Stocks tumbled on Thursday as a sharp drop in oil fueled an already weak market that faltered after Federal Reserve Chairman Ben Bernanke's downbeat comments a day earlier.

U.S. crude futures dropped 4.4 percent and the dollar climbed sharply after the International Energy Agency (IEA) said it will release 60 million barrels of oil from strategic stockpiles to help the global economy.

The news revived worries over the economy and sent the market back on track toward a correction from the May S&P 500 high of 1,370. Buyers had helped stocks rebound from three-month lows in recent days, but they have evaporated as selling pressure builds.

In the short term, oil is selling off on the news of the reserve release, but the main problem here is the economic slowdown, said James Dailey, portfolio manager of TEAM Asset Strategy Funds in Harrisburg, Pennsylvania.

The Dow Jones industrial average <.DJI> slid 204.46 points, or 1.69 percent, at 11,905.21. The Standard & Poor's 500 Index <.SPX> took off 20.20 points, or 1.57 percent, at 1,266.94. The Nasdaq Composite Index <.IXIC> was down 30.76 points, or 1.15 percent, at 2,638.43.

The S&P was just couple points above its 200-day moving average, a key level of buying support, at 1262.57.

The stock market has come to a realization that the slowdown is worse than expected, that we are not just in a soft patch, but a long-term slowdown, Dailey said.

Energy stocks got hit after the IEA news. The S&P energy sector <.GSPE> dropped 2.7 percent, while Chevron Corp fell 3.2 percent to $97.83 and was the biggest decliner on the Dow. Exxon Mobil Corp took off 2.9 percent at $77.51.

Reflecting market uncertainty, the CBOE Volatility Index <.VIX>, Wall Street's so-called fear gauge, jumped 14.5 percent.

New claims for unemployment benefits rose more than expected last week, suggesting little improvement in the labor market this month after employment stumbled in May.

Separate data showed sales of new homes fell 2.1 percent in May, but inventories hit a record low and the median sales price rose slightly.

Bernanke on Wednesday cut the forecast for U.S. economic growth and offering no hint of further monetary support.

Following the bleak outlook, European Central Bank President Jean-Claude Trichet said Thursday the warning lights are flashing red on the euro zone's debt crisis.

Further souring the mood, China's factory sector barely expanded in June even as price pressures eased, reflecting the impact of monetary policy tightening and sluggish global demand.

Bristol-Myers Squibb Co rose 4.7 percent to $29.05 after the company said a blood thinner it developed with Pfizer Inc

proved safer than warfarin in preventing strokes. Pfizer was up 2.8 percent to $20.83.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)