Stocks opened higher but quickly gave up their gains after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. The reading came in well short of what Wall Street had been expecting and underscored the seriousness of the economic concerns that have gripped both Wall Street and Washington in recent weeks.
Credit concerns also dogged Wall Street after rating agency Moody's Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade. That possibility alarmed Wall Street because it would place all bonds insured by Ambac on review as well. Ratings agencies are concerned that bond insurers would be unable to absorb a spike in claims.
The latest economic woes emerged as Fed Chairman Ben Bernanke, testifying before the House Budget Committee, warned the risks of an economic downturn have grown more pronounced. While his comments largely echoed his previous remarks, he lent support to a notion also backed by the White House on Thursday that an economic stimulus package could help the economy sidestep recession.
Thursday's session, with the latest in a series of triple-digit declines in the Dow, showed much of the rockiness that has taken stocks sharply lower in the short time since the year began. Investors fears of a slowing economy again dominated trading.
"The Philadelphia Fed just announced dreadful numbers," said John O'Donoghue, co-head of equities at Cowen & Co. He said if you look back at Philadelphia Fed data for similar numbers, it takes you back to the 2001 to 2002 recession.
"It's not rocket science -- the economy is slowing dramatically, and it's being reflected in economic reports."
In the final half hour of trading, the Dow, which had been up more than 50 points early in the session, fell 286.46, or 2.30 percent, to 12,179.70.
Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 37.00, or 2.69 percent, to 1,336.20, and the Nasdaq composite index declined 41.76, or 1.74 percent, to 2,352.83.
Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 1.81 billion shares.
Bond prices rose as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.62 percent from 3.68 percent late Wednesday. The dollar was mixed against other major currencies.
Light, sweet crude fell 71 cents to settle at $90.13 a barrel on the New York Mercantile Exchange after Bernanke's prediction of slower economic growth this year. Slowing growth could dampen demand for oil.
The Philadelphia manufacturing reading caught Wall Street by surprise -- igniting fears that the economy is slowing precipitously and that policymakers might be too late in aiding it.
Economists had expected the Philadelphia index would come in at a negative 1.5, according to Dow Jones Newswires. Instead, the negative 20.9 figure was the weakest since October 2001 when the economy was reeling from the shock of the Sept. 11 terror attacks.
Jim Herrick, manager of equity trading at Baird & Co., contends that the Philadelphia Fed reading and other recent negative economic reports indicate the economy is likely in a downturn.
Other economic reports added to investors' glum mood. The Commerce Department said housing starts plunged 14 percent to 1.01 million in December, marking the weakest pace of home building in more than 16 years. In addition, permits to build new homes dropped 8 percent last month to 1.07 million, the lowest level since 1993.
Thomson/IFR had forecast smaller declines for both housing starts and building permits. Still, some economists pointed out that the weakness may prove helpful in the long run, as smaller inventories of homes will take some pressure off the housing sector.
In one bright spot, the Labor Department reported jobless claims dropped by 21,000 to 301,000 in the latest week. Claims had been expected to rise by 8,000 to 330,000, according to Thomson/IFR. However, the weekly readings can be volatile.
The week's steady flow of news, much of which has dented investor sentiment, has led to a growing chorus of calls for the Fed to cut rates. The Fed's monetary policy committee will meet Jan. 29-30 and is widely expected to lower its Fed funds target from the current 4.25 percent level. Bernanke on Thursday reiterated recent signals that the central bank will reduce rates for a fourth straight time.
Some on Wall Street have called for the Fed to intervene sooner with steep rate cuts.
The economic concerns come in a week in which some of Wall Street's biggest names have posted huge losses following bad bets on mortgage investments. Financial shares fell sharply Thursday after the reports have made clear that there is also increasing weakness in home equity and other consumer banking operations. The problems with subprime and home equity, along with a badly stalled housing market, are among the chief reasons investors are pinning their hopes on stimulus efforts and cheaper lending rates.
Merrill Lynch & Co. on Thursday posted a massive loss that underscored the depth of the economy's credit problems. The world's largest brokerage said it lost $9.91 billion in the fourth quarter, hurt by massive write-downs from investment and trades battered by the ongoing credit crisis.
John Thain, the new chief executive at Merrill, said he believes this will be the bulk of the company's write-downs from its subprime mortgage exposure. But he would not speculate about what 2008 might hold in store in other areas. Earlier this week, Merrill secured a new round of capital infusions from foreign funds.
Merrill fell $5.46, or 10 percent, to $49.63.
Moody's announcement that it will review Ambac came after the insurer booked a $5.4 billion write-down on its credit derivative portfolio during the fourth quarter.
Ambac plunged $6.88, or 53 percent, to $6.09, while Ambac rival MBIA Inc. fell $4.44, or 33 percent, to $8.99. First Horizon National Corp. fell $3.24, or 17.2 percent, to $15.65 after Standard & Poor's Ratings Services lowered its rating on the bank's long-term credit.
The Russell 2000 index of smaller companies fell 17.31, or 2.47 percent, to 682.60.
Overseas, Japan's Nikkei stock average closed up 2.07 percent. Britain's FTSE 100 finished down 0.68 percent, Germany's DAX index fell 0.78 percent, and France's CAC-40 fell 1.31 percent.
