Stocks suffered their worst drop in a month after the Federal Reserve said there were significant downside risks to the economy even as it took another stab at boosting growth.

Selling accelerated as volume spiked in the last hour of trading, with banks and insurers leading the decline, as the KBW Bank index <.BKX> slid 5.5 percent and the KBW Insurance index <.KIX> off 5.2 percent. Bank of America lost 7.5 percent to $6.38 and Prudential Financial Inc

slid 6.6 percent to $45.73.

The Fed, as expected, said it would buy more long-term Treasury securities in an effort to lower borrowing rates. But investors worry that the Fed's latest plan will have little effect on lending in an economy that appears to be stagnating, which the Fed also noted.

That was probably the biggest statement when he said 'significant downside risks,' said Alan Valdes, director of floor operations for DME Securities in New York. Considering we've done over $1 trillion, and it hasn't moved the needle at all, he added, referring to the Fed's previous stimulus efforts.

Traders attributed the late-day drop to investors pulling back from bets made during last week's rally, and new short positions after the market failed to rise on the Fed news.

The Fed's $400 billion plan, dubbed Operation Twist by market participants, is the latest in a series of steps aimed at reviving an economy that has struggled to rebound from the 2008 financial crisis. Investors are less optimistic after previous efforts, particularly in light of the Fed's own statement pointing to economic risks.

Insurers were some of the hardest-hit names as Operation Twist could threaten the earnings of some of the country's largest insurers for years to come.

The KBW Insurance Index <.KIX> lost 5.2 percent, led by Lincoln National , which dropped 8.4 percent to $16.63. Insurers' investment portfolios are going to have a hard time keeping up with their obligations if the Fed successfully keeps rates at very low levels.

Investment yields are going to remain low and life insurers, in particular, are leveraged to the market directly and indirectly through their investment portfolio and the annuities that they've sold, Morningstar insurance analyst Drew Woodbury said.

The Dow Jones Transportation Average <.DJT>, seen as a proxy for economic health, fell 5.3 percent. Railroad Norfolk Southern Corp slid 8.3 percent to $61.93.

The Dow Jones industrial average <.DJI> dropped 283.82 points, or 2.49 percent, to 11,124.84. The Standard & Poor's 500 Index <.SPX> lost 35.33 points, or 2.94 percent, to 1,166.76. The Nasdaq Composite Index <.IXIC> fell 52.05 points, or 2.01 percent, to 2,538.19.

The Fed will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to buy longer-dated Treasuries.

Traders also said until the Fed news there was a risk the Fed might surprise with more aggressive efforts than expected. With the plan details now known -- and it appearing to be an extension of previous efforts -- pessimistic types felt more secure in betting on more declines.

Market participants have been operating with a fear of potential good news and the news today basically took that fear off the table, it allowed the shorts to aggressively come back into the market, said Michael Marrale, managing director and head of sales trading at RBC Capital Markets in New York.

The Fed said economic growth remains slow, and recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.

Moody's Corp cut the debt ratings of Bank of America Corp, Wells Fargo & Co and Citigroup Inc , saying the U.S. government is getting less comfortable with bailing out large troubled lenders.

There were a few bright spots in the tech sector.

Oracle Corp gained 4.2 percent to $29.54 a day after forecasting higher-than-expected earnings for the current quarter as well as robust sales. Earlier, Oracle climbed to $30.96, nearly an 8-week high.

Hewlett-Packard Co shares jumped 6.6 percent to $23.96 after a source familiar with the matter said the company's board is considering ousting Chief Executive Officer Leo Apotheker after less than a year on the job, and replacing him temporarily with former eBay CEO Meg Whitman.

Trading was active, with about 9.12 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 7.91 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,577 to 437, while on the Nasdaq, decliners beat advancers 2,124 to 436.

(Reporting by Chuck Mikolajczak; Additional reporting by Ben Berkowitz; Editing by Jan Paschal)