U.S. Stocks Plunge As Economic Worries Grow; Dow Falls 307 Points

NEW YORK (MarketWatch) -- U.S. stocks sold off for a third straight day on Thursday, with the Dow sinking to a 10-month low in its worst day since Nov. 7, after Federal Reserve Chairman Ben Bernanke spoke about the country's economic trouble and a regional measure of economic activity contracted.

"When reminded about how bad things are, the market remembers it should go down," said Art Hogan, chief market strategist at Jefferies & Co.

"And, it is going to take more than just monetary policy to clean up the mess we've made with this economy," Hogan said.

"The Philadelphia Fed Survey was a disaster, defying even the most pessimistic projections," said Frederic Ruffy, an analyst at Optionetics.

Up about 50 points after the start, and then down more than 100 points in early morning trade, the Dow Jones Industrial Average shed 307 points, or 2.5%, to end at 12,159.2, with all 30 of its components finishing lower.

In the 12 trading sessions since the year began, the blue-chip index has declined more than 1,100 points, or 8.3%.

Blue-chip declines were led by American International Group Inc. , down 6.3%, and Merck Co. Inc. , off 6%.

The S&P 500 declined 39.94 points, or 2.9%, to 1,333.26, while the Nasdaq Composite fell 47.69 points, or 2%, to 2,346.9.

And in a further reminder that there are more shoes likely to drop in the financial sector, shares of Ambac Financial Group Inc. fell 51.9% on news Moody's had put the company under review, with a downgrade possible.

The market had opened higher as investors interpreted earlier economic data as solidifying chances of interest-rates cuts ahead, and a large loss by Merrill Lynch & Co. as getting bad news out of the way.

Volume on the New York Stock Exchange surpassed 2.1 billion, and declining stocks beat those rising 5 to 1. On the Nasdaq, 2.8 billion shares traded, and decliners outdid advancing issues, 3 to 1.

On the New York Mercantile Exchange, crude-oil futures fell 71 cents to $90.13 a barrel. Gold futures fell $1.5 to close at $880.5 an ounce. .

Fed factor

Bernanke on Thursday told Congress that lawmakers could help steer the economy away from recession if they adopt an efficient and temporary stimulus plan. .

The Federal Reserve Bank of Philadelphia reported its index of manufacturing activity in the region contracted sharply in January to its lowest level since October 2001. .

The Commerce Department reported construction on new homes fell 14% in December, to the slowest pace in more than 16 years. .

Separately, the Labor Department's count of those filing for state jobless benefits last week fell to its lowest level in nearly four months, while the four-week average of continuing claims climbed to its highest count since November 2005.

Of companies reporting earnings, financial titan Merrill Lynch became the latest to be humbled by the credit-market crisis, swinging to a loss of $9.8 billion after writing down $11.5 billion.

Merrill stock fell 10.3% to $49.45, its lowest since September 2004.

Shares of Bank of New York Mellon fell 0.7% after it reported a 68% decline in profit after taking a $118 million write-down related to collateralized debt obligations and a $180 million charge for bringing a conduit onto its balance sheet.

After the close, International Business Machines will release the full details of its quarterly performance. Big Blue released preliminary numbers on Monday.

IBM stock fell 0.5%.

EBay got a lift, up 0.6%, after Bear Stearns upgraded the online auctioneering firm to outperform from peer perform, saying the investor-sentiment pendulum had swung too far toward fear.

U.S. stocks wobbled on Wednesday before closing lower, with the Dow industrials losing 34 points, the Nasdaq Composite dropping 23 points and the S&P 500 ending nearly 8 points lower.

By Kate Gibson