Meanwhile, an index that tracks developers' expectations of future home sales fell to an all-time low, and crude oil prices briefly reached a new high.
at the New York Economic Club elevated concerns that the summer credit crisis might persist into the winter -- a sobering thought for investors, who are sifting through mixed third-quarter earnings and watching energy costs rise.
"First of all, the worry is we're getting more bad news on housing. Number two is higher oil prices. That's a pretty bad combination," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.
Crude oil prices briefly spiked to a record above $88 a barrel Tuesday, and a National Association of Home Builders' index that tracks developers' expectations of future home sales fell for the eighth straight month to the lowest point since January 1985.
Johnson added: "Of particular concern were the comments by Bernanke. That sort of injected a fairly high level of uncertainty into the economic and earnings outlook. That comes at a time when earnings results are not particularly exciting -- in fact, are dismal."
In another troubling report, Southern California home sales plummeted in September to the lowest level in two decades as lenders balked at financing the most expensive homes, a real estate tracking firm said Tuesday.
It was the slowest month since DataQuick Information Systems began keeping records in 1988.
Paulson echoed Bernanke's concerns Tuesday, calling for an aggressive response to the unfolding housing crisis, which he said represents "the most significant current risk to our economy."
His comments represented the administration's most detailed reaction to the steepest housing slump in 16 years. He said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.
He also called for an overhaul of laws and regulations governing mortgage lending to halt abusive practices that contributed to the current crisis.
"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said in a speech delivered at Georgetown University's law school. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
The Dow Jones industrial average and the Standard & Poor's 500 index posted their biggest point drops in five weeks Monday, after Citigroup Inc. reported a steep third-quarter profit decline and announced plans with a consortium of banks to set up a fund to help bail out the credit markets.
Then Tuesday, Wells Fargo & Co. shares fell more than 3 percent after the bank said third-quarter earnings increased less than analysts anticipated and that it boosted loan loss reserves in anticipation of further problems in consumer credit. KeyCorp shares declined more than 5 percent after the Midwest regional bank posted a 33 percent drop in third-quarter profit.
In mid-afternoon trading, the Dow fell 60.07, or 0.43 percent, to 13,924.73.
Broader indicators also fell. The S&P 500 index slid 7.28, or 0.47 percent, to 1,541.43, and the Nasdaq composite index dipped 6.59, or 0.24 percent, to 2,773.46.
Bond prices rose as investors pulled money out of stocks, and the yield on the 10-year Treasury note fell to 4.64 percent from 4.68 percent at Monday's close. Bond prices and yields move in opposite directions. The dollar rose against most currencies. Gold also rose.
Bernanke said in his speech that the deepening housing slump probably will be a drag on economic growth. Still, he again pledged to "act as needed" to help financial markets that were sent reeling this summer.
He did say that inflation remains in check. That could be a key factor for policymakers when deciding whether to cut interest rates at their Oct. 30-31 meeting.
Bernanke, though, gave no indication which way the Fed would go on interest rates, reports CBS News correspondent Susan McGinnis.
But while core inflation -- which excludes volatile food and energy prices -- is mild, oil prices are pushing further into record territory on speculation about supply disruptions.
Crude futures rose $1.54 to $87.67 a barrel on the New York Mercantile Exchange, after briefly surpassing $88.
Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange. Volume came to 648.7 million shares.
Overseas, Japan's Nikkei stock average fell 1.27 percent and Hong Kong's Hang Seng index fell 1.98 percent. Britain's FTSE 100 fell 0.45 percent, Germany's DAX index fell 0.09 percent, and France's CAC-40 fell 0.57 percent.