The government said the number of people seeking unemployment benefits rose last week and that demand at the nation's factories has fallen by the largest amount in nearly two years. The market is interpreting the Commerce Department report on factories as a sign that tight credit conditions are hitting manufacturers.
"The economy is what's driving this weakness," said Subodh Kumar, global investment strategist at Toronto-based Subodh Kumar & Associates. "I think now what's going on is a focus on the economic weakness in a whole bunch of areas."
He also said "the next couple of days are going to be pretty intense politically" as Wall Street girds for another vote on the financial bailout plan.
The bill that passed the Senate late Wednesday will be sent to the House as soon as Friday. The latest version of the bill adds $100 billion in tax breaks for businesses and the middle class and raises the limit on federal deposit insurance to $250,000 from $100,000.
Supporters are hoping the sweetened bill will be more palatable to some of the 133 House Republicans who rejected the measure in a vote Monday that took Wall Street, and many on Capitol Hill, by surprise.
Those in favor of the plan to let the government buy billions of dollars in bad mortgage debt and other now-soured assets say it will help unclog the world's ailing credit markets. Banks are fearful of making loans, even to each other, because of worries they won't be repaid. That, in turn, is weighing on the economy, making borrowing more difficult and expensive for businesses and consumers alike.
The credit markets showed some increased strain Thursday. The yield on the 3-month T-bill, the safest type of investment, rose to 0.80 percent from 0.79 percent late Wednesday. The historically low yields indicate investors are willing to accept the smallest of returns to safeguard their money.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.68 percent from 3.74 percent late Wednesday.
The Dow fell 274.39, or 2.53 percent, to 10,556.68 after earlier falling more than 300. The blue chips plunged nearly 778 points Monday, logged a partial rebound Tuesday and finished modestly lower Wednesday; still the Dow has had triple-digit swings every day this week.
Broader stock indicators also fell sharply Thursday. The Standard & Poor's 500 index fell 36.43, or 3.14 percent, to 1,124.63, and the Nasdaq composite index fell 68.27, or 3.30 percent, to 2,001.13.
Light, sweet crude fell $3.71 to $94.82 a barrel on the New York Mercantile Exchange. The dollar rose against most currencies, while gold prices fell.
Analysts believe that investors remain anxious that backers of the government plan might not have enough support. Passage of the bill would, at the very least, provide some relief amid some recent signs that the economy is slowing faster than expected.
Billionaire investor Warren Buffett said the U.S. has been hit with an "economic Pearl Harbor," and the government must respond quickly. "That sounds melodramatic, but I've never used that phrase before. And this really is one," Buffett said in an appearance on the "The Charlie Rose Show" that aired Wednesday night on PBS stations.
Investors might get another grim reading about the economy on Friday when the Labor Department releases its September jobs report, one of the most closely watched indicators. The September non-farm payrolls report from the Labor Department is expected to show a loss of 100,000 jobs, according to a median estimate from economists. That would be the ninth straight month that the economy has lost jobs.
The Labor Department's report that initial claims for unemployment benefits rose by 1,000 last week to a seasonally adjusted 497,000 unnerved investors worried about not only about strains in the financial market but also the effect on the broader economy. Analysts had been expecting unemployment claims would fall to 475,000; instead, the level of jobless claims is the highest seen since the immediate aftermath of the Sept. 11, 2001, terrorist attacks.
Beyond employment, orders for manufactured goods fell by 4 percent in August from July. Economists had expected a 2.5 percent decline. It is the biggest drop since a 4.8 percent decline in October 2006.
The dollar was higher against other major currencies, particularly the euro, even after the European Central Bank left interest rates unchanged. Higher interest rates in Europe generally make the euro more attractive to investors than the dollar.
Shares of General Electric Co., one of the 30 stocks that comprise the Dow industrials, fell $2.26, or 9.24 percent, to $22.24 after the conglomerate said it was pricing an offering of 547.8 million shares at $22.25 apiece. The offering price is 9 percent below where the stock ended Wednesday.
The company said it would sell the shares Wednesday as it announced that Buffett's Berkshire Hathaway Inc. would buy $3 billion worth of GE preferred shares. GE, which draws nearly half its profits from its finance business, is reducing how much money it draws from the commercial paper market - the now largely frozen well where many companies turn to raise money for day-to-day expenses.
Wall Street found some room for optimism, however, after Swiss bank UBS said Thursday it expects to turn a "a small profit" in the third quarter after a string of losses. The forecast from the company, which has taken billions of dollars in mortgage-related write-downs, stirred hopes that some banks' troubles could be on the mend. UBS rose 24 cents to $19.19.
Declining issues led advancers by a 3 to 1 margin on the New York Stock Exchange, where volume came to 711.9 million shares.
Overseas, Japan's Nikkei stock average fell 1.88 percent. In afternoon trading, Britain's FTSE 100 fell 1.12 percent, Germany's DAX index fell 2.40 percent, and France's CAC-40 lost 1.77 percent.
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