Setting a negative tone that persisted throughout the session, the ADP employment index had private-sector firms shedding 693,000 jobs in December, with the tally proving far worse than expected and prompting quick hang-wringing about Friday's employment report. .
"The ADP employment report was a wake-up call that not all the bad news is already priced into the market," said Elliot Spar, option market strategist at Stifel Nicolaus.
Near session lows, the Dow Jones Industrial Average was off 209.71 points, or 2.4%, to 8,805.39 in early afternoon trading, with only three of 30 components managing to trade in the green.
Alcoa paced blue-chip declines, its shares down 5.5% after the aluminum giant said late Tuesday that it would cut 13,500 jobs and close plants to conserve cash.
Intel also dragged on the Dow, its shares off 4.9% after warning it expects its fourth-quarter revenue to fall 23% from a year ago to $8.2 billion.
General Motors Corp. led the Dow's minority gains, with shares of the automaker climbing 2.7%.
The S&P 500 Index dropped 23.09 points, or 2.5%, to 911.61, with energy, financials and consumer discretionary leading the broad-market declines.
Health care and consumer staples lagged the least among the S&P's 10 industry groups, bolstered by companies including Tenet Healthcare Corp. , up 10%, and Supervalu Inc. , up nearly 12%.
The Nasdaq Composite declined 43.76 points, or 2.7%, to 1,608.62, weighed by Intel's warning.
The broader tech sector was also hit by news that Indian software giant Satyam Computer Services Ltd. overstated more than $1 billion. .
Trading in Satyam was halted until further notice on the New York Stock Exchange ahead of the market's open, with the exchange saying regulators were evaluating news related to company.
Satyam's founder and chairman quit after revealing the company's inflated balance sheets in what could prove to be India's largest corporate fraud.
Bucking the flood of negative corporate reports, Monsanto Co. said its fiscal first-quarter profit climbed 54% on farmer demand for its genetically engineered seed and strength in Latin America. Shares of the seed and herbicide supplier jumped more than 16%. .
On the New York Mercantile Exchange, oil and gold futures both declined, with crude for February delivery off $4.67 at $43.91 a barrel after weekly data showing U.S. inventories climbed more than expected. .
Gold for February delivery declined $24.30, or 2.8%, to end at $841.7 an ounce.
Volume on the New York Stock Exchange topped 635 million, with nearly four stocks on the decline for every issue on the rise. Almost 462 million shares traded on the Nasdaq, and decliners beat advancers more than 2 to 1.
More bad news for economy
The ADP jobs report wasn't the only data set dragging down sentiment Wednesday.
The Congressional Budget Office estimated the U.S. government would run a $1.2 trillion budget deficit in fiscal 2009, and also forecast that unemployment could exceed 9% early next year.
"We're seeing enormous layoffs take place now that might have been spread out over the next six or nine months in previous downturns," said Joel Naroff, chief economist at TD Commerce Bank and president of Naroff Economic Advisors. .
Asian markets were mixed, with the Hang Seng dropping 3.4% in Hong Kong, while the Nikkei 225 added 1.7% in Tokyo.
In Europe, a combination of profit taking and fund-raising plans hurt stocks, with the FTSE 100 losing 2.2% in London and the pan-European Stoxx 600 faltering 1.2%. Utilities and oil prducers weighed on the market. .
U.S. stocks had closed higher Tuesday as President-elect Barack Obama stumped for his recovery plan on Capitol Hill, even as minutes from December's Federal Open Market Committee meeting offered a bleak view of the economy. The Dow industrials rose 62 points, the Nasdaq Composite rose 24 points and the S&P 500 added 7 points.
Obama remained focused on the economy Wednesday, saying his economic stimulus package, still being hammered out with lawmakers, would likely be on the "high side" of his team's estimates of between $675 billion and $775 billion during the next two years.
By Kate Gibson