U.S. stocks fell on Thursday as the dollar's rebound spurred a safe-haven trade, cutting demand for riskier assets, while a soft profit outlook from economic bellwether FedEx sank transportation shares.

Financial services stocks took a beating after influential banking analyst Meredith Whitney cut her earnings estimates on Goldman Sachs Group Inc and Morgan Stanley .

The U.S. dollar index <.DXY>, which measures the greenback's performance against a basket of major currencies, rose nearly 1 percent -- hitting its highest level in more than three months.

In recent months, stocks have risen sharply while the greenback dropped, as investors took advantage of the inexpensive currency to buy higher-yielding assets.

The dollar is starting to spook the market here a little bit, said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.

An unexpected increase in new claims for jobless benefits in the latest week illustrated the bumpy road for the U.S. economic recovery. The jobless claims offered a sharp contrast to a report from the Federal Reserve Bank of Philadelphia, whose index showed factory activity accelerated rapidly in the U.S. Mid-Atlantic region in December.

The Dow Jones industrial average <.DJI> dropped 132.86 points, or 1.27 percent, to end at 10,308.26. The Standard & Poor's 500 Index <.SPX> fell 13.10 points, or 1.18 percent, to 1,096.08. The Nasdaq Composite Index <.IXIC> lost 26.86 points, or 1.22 percent, to close at 2,180.05.

The market shuddered after FedEx Corp forecast third-quarter profit below analysts' expectations, pushing its stock down 6.1 percent to $84.47. The Dow Jones Transportation Average <.DJT> lost 1.2 percent.

Whitney trimmed earnings estimates for Goldman and Morgan for 2010 and 2011. Goldman Sachs shares dropped 2.5 percent to $160.93, while Morgan Stanley shed 4 percent to $29.12.

The S&P Financial Index <.GSPF> slid 1.8 percent, while the NYSE Arca Broker/Dealer Index <.XBD> fell 2 percent.

Citigroup Inc tumbled 7.3 percent to $3.20 after the bank's stock and bond offering attracted weak demand and priced much lower than expected, prompting the U.S. Treasury to delay a plan to sell its Citigroup stake, sometime within the next 12 months.


Research In Motion's stock jumped 10.8 percent to $70.40 in extended trade on Nasdaq after the BlackBerry maker reported better-than-expected quarterly results.

Software maker Oracle Corp gained 4.2 percent to $23.84 in after-hours trade after posting adjusted earnings that topped Wall Street's estimates.

During the regular session, the dollar's spike coincided with a slide of nearly 3 percent in the price of gold. The sell-off in gold futures hurt the shares of U.S.-listed gold miners. The Arca Gold Bugs index <.HUI>, which measures the performance of 15 gold miners with U.S-traded shares, tumbled 5.9 percent.

The U.S. Senate Banking Committee approved the nomination of Federal Reserve Chairman Ben Bernanke for a second term, sending it to the full Senate for a confirmation vote. Stocks were relatively unaffected after the vote.

Among other factors influencing the market's mood, analysts

pointed to the impact of Friday's quarterly expiration and settlement of December options and futures, also known as quadruple witching. This often adds high levels of volatility as players adjust and/or exercise their derivatives positions.

(Editing by Jan Paschal)