NEW YORK - Investors on Wall Street and around the world sold stocks with abandon Thursday, more convinced than ever that the United States and perhaps the globe are headed for a new recession.
After dropping 527 points, the Dow Jones industrial average closed down 391 points, the second consecutive rout in the stock market since the Federal Reserve announced a change in strategy for fighting the economic slowdown.
One financial indicator after another showed that investors are quickly losing hope that the economy can keep growing. The price of oil and metals, both of which depend on economic demand, fell sharply. Traders bought bonds for safety.
"Markets rely on confidence and certainty. Right now there is neither," said John Canally, an economic strategist at LPL Financial, an investment firm in Boston.
Economic news was bad around the world. A closely watched survey in Europe indicated a recession could be on the way there, and a manufacturing survey suggested a slowdown in China, which has been one of the hottest economies.
"The probability of going back into recession is higher now than at any point in the recovery," said Tim Quinlan, an economist at Wells Fargo. He put his odds of a recession at 35 percent, the highest yet.
Christine Lagarde, the head of the International Monetary Fund, said the world economy was "entering a dangerous phase." She told an annual meeting of the IMF and World Bank that nations need credible plans to get their debt under control.
At the close of trading, the Dow was down 391.01 points, or 3.5 percent, at 10,733.83. The Standard & Poor's 500 index fell 37.18, or 3.2 percent, to 1,129.58. The Nasdaq composite fell 82.52, or 3.3 percent, to 2,455.67..
The Dow's lowest close this year is 10,719 on Aug. 10. The Dow has fallen more than 15 percent in two months, since traders began focusing on recession fears and the market was gripped by volatility.
On Thursday, investors looking for a safe place to put their money bought American government debt, which they see as less risky than stocks even as the nation wrestles with its long-term budget.
The yield on the 10-year Treasury note hit a record low of 1.71 percent, down from 1.86 late Wednesday. Yields fall as investors buy bonds and send their prices higher.
The Fed, adopting a new strategy to try to get the U.S. economy going, announced Wednesday that it would shuffle $400 billion of its own holdings in hopes of reducing interest rates on long-term loans.
CBS MoneyWatch's Jill Schlesinger offers a quick primer on the Fed's strategy, known as "Operation Twist," which is an effort to make credit cheaper and spur spending and investment:
The central bank hopes that allowing people and businesses to borrow money more cheaply will encourage them to spend it throughout the economy, providing a lift that could turn it around.
The Fed statement troubled investors. It offered a bleak assessment of the future of the U.S. economy, saying it sees "significant downside risks to the economic outlook," including volatility in overseas markets.
"In financial markets, the thinking seems to be: If the Fed is worried, the rest of us ought to be really worried," said Brian Gendreau, senior investment strategist at Cetera Financial Group.
Economists say the Fed action may help, but probably not much. The only thing that will help is for people and businesses to start spending more money, said Uri Landesman, president of Platinum Partners, a hedge fund.
"Counting on the Fed to get us out of this is a mistake," he said.
The price of commodities like oil and metals dropped steeply because investors worried that demand for them would fall if the world economy keeps slowing or falls into recession again.
Oil dropped more than $5 a barrel to $80.51, its lowest settling price since Aug. 9. The selling reflected concerns that world demand for oil would fall if the economy slows.
Michael Lynch, president of Strategic Energy & Economic Research, pointed to the dark outlook from the Fed and to a rare public warning by the chief economist of the European Central Bank that heavy government debt threatened the euro, the currency shared by 17 European nations.
"This is just sudden and strong confirmation that the economy is not improving," he said. "Energy demand is going to be very poor."
Silver fell 9.6 percent, and gold fell 3.7 percent. Earlier this summer, gold set one record high after another. Investors wanted it both as a safe place for their money and to cash in on what seemed an unstoppable run.
In a broader reading of the U.S. stock market, the Standard & Poor's 500 index fell 40 points, or 3.5 percent, to 1,126. The S&P is barely higher than its lowest point in August, 1,119.
The Nasdaq composite fell 89, or 3.5 percent, to 2,449.
Stocks fell sharply even though the New York Stock Exchange executed a rule designed to smooth trading. The exchange invoked Rule 48, which limits how much information is released about stock trades.
Stock volatility rose anyway. The VIX, an index that measures investor fear, rose 8 percent to 40.4, well above average.
It's common for stocks to move dramatically after the Fed makes a big announcement. But the number of trades that can be made instantly has also gone up in recent years, causing big swings to happen more quickly.
"These major moves are much more compressed, time-wise, than in the past," Landesman said. "A 5 percent move can now happen in a couple of minutes as opposed to a week or two."
Some analysts thought the heavy selling was an overreaction.
"The facts show we are not in a recession, and we are not borderline recession," Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi, wrote in a report Thursday.
The U.S. economy grew at an annual rate of 0.7 percent in the first half of this year, the slowest growth since the end of the Great Recession in June 2009. It would take much healthier growth, 4 or 5 percent, to bring unemployment down significantly.
The government reported Thursday that fewer Americans filed new claims for unemployment benefits last week. But the decline wasn't nearly enough to raise any real hope that the job market is getting better.
Elsewhere in the world, economic reports weren't much better. A gauge of European business activity fell to its lowest level since July 2009, and industrial orders in Europe fell in July.
The data suggest that constant gloom surrounding a debt crisis among European nations is causing people and businesses to cut back on spending, which could push the region into recession.
"Odds of Europe falling into recession are uncomfortably high and rising," said Ryan Sweet, an economist at Moody's Analytics.
Asian stocks were hammered to start the world's trading Thursday. The Nikkei index in Japan fell 2.1 percent. The main stock averages fell 2.9 percent in South Korea, 2.6 percent in Australia and almost 5 percent in Hong Kong.
Europe fared even worse. The stock market fell 5.3 percent in France and 5 percent in Germany. Besides the economic headache, Europe is wrestling with how to tame a big debt problem.
In the U.S., FedEx stock fell 9 percent after it said that it would earn less in 2012 than it had expected. The company is seen as an indicator because demand for shipping rises and falls with the economy.
The next big round of corporate earnings reports doesn't start for several weeks, but many analysts expect big companies can't sustain the strong profits they have posted for the last few quarters.