"There is still a lot out there that hasn't been resolved, including the ability to raise capital," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank Private Wealth Management.
The Dow Jones Industrial Average was off 161.4 points, or 1.1%, at 13,287, with 29 of its 30 component stocks trading lower. Financials, including American Express Co. and JPMorgan Chase & Co. led the Dow's decline.
The late-session release of the Federal Reserve's Beige Book, which found the credit crunch and financial market turmoil had little impact on economics through the end of August, did little to appease the bearish sentiment, with the major indexes retaining the bulk of their losses. .
The S&P 500 was off 18.05 points, or 1.2%, at 1,471.73. The Nasdaq Composite declined 23.27 points, or 0.8%, at 2,607.75.
At the New York Stock Exchange, volume topped 1 billion shares, with declining stocks outpacing advancing issues 3 to 1. At the Nasdaq, 1.5 billion shares traded hands as decliners topped advancers by a 2 to 1 ratio.
Ahead of the bell, the release of the ADP employment report pointed to lackluster jobs growth in the private sector, with August proving to be the slowing month for hiring in four years.
The market extended its losses after the National Association of Realtors reported contract signings on existing homes fell 12.2% in July, the weakest performance in nearly six years.
The ADP and home sales data are "just a reminder to the market about all the things it's worried about," Jeffrey Kleintop of LPL Financial Services.
"We're on hold to some extent ahead of the employment number," said Fitzpatrick of Friday's figures, which he said could pose trouble for the market even if the report exceeds expectations as it "could push the Fed off from reducing interest rates."
"If we get a low number and a rise in the unemployment rate, the pressure on the Fed to ease will be enormous. It could be game, set and match on Friday when we get a peak at the jobs situation," said Joel Naroff, president and chief economist at Naroff Economic Advisors Inc.
Earlier on, Challenger Gray & Christmas said tens of thousands of jobs were lost in August because of trouble in the mortgage industry, with the outplacement firm's monthly tally of corporate layoffs climbing by 85% last month.
"The culmination of softer labor market news, particularly from initial jobless claims but also with the ADP data, now point to some downside risks for the payroll report," said Lehman Brothers analyst John Shin.
The reports suggest nonfarm payrolls may have grown far slower than the 123,000 anticipated by economists ahead of Friday's report from the Labor Department.
"The ADP figure of 38,000 for August translates to a 103,000 nonfarm payroll gain," wrote analysts at Action Economics.
Lehman Brothers trimmed its payroll forecast to 80,000 from 95,000, Shin said.
"Incoming data will continue to be overshadowed by the headlines -- as the credit, Fed, housing saga unfolds -- the biggest near-term challenge to this thesis is Friday's employment report," said David Ader, U.S. government bond strategist at RBS Greenwich Capital.
In another illustration of the recent turmoil in the mortgage business, mortage insurers MGIC Investment Corp. and Radian Group Inc. pulled the plug on merger plans, saying market conditions made the transaction too difficult.
Overseas, the Bank of England moved to cushion the blow from turmoil in the credit markets, saying it would increase by 6% the amount of reserves each bank can hold with the central bank. he step is expected to help lenders such as Barclays , which has twice in recent weeks sought funding from the Bank of England at a penalty rate.
Stocks on the move
In a broadly lower market, shares of Kraft Foods Inc. were 1.5% ahead after the food giant boosted its full-year per-share earnings guidance to a range of $1.60 to $1.62 from $1.50 to $1.55.
Tyson Foods Inc. shares fell 12.5% after the Springdale, Ark.-based company cut its earnings forecast for fiscal 2007.
Yahoo Inc. gained 0.8% after announcing late Tuesday an agreement to acquire online ad company BlueLithium for $300 million, while Cognos fell 1.6% after it disclosed a $17.87-a-share deal for Applix , the price of which soared 22%.
Dow component Altria Group Inc. also lost ground, falling 1.8%, after the tobacco group's downgrade, by Goldman Sachs, to neutral from buy.
And shares of Finisar Corp. fell nearly 19%. The fiber-optic firm reported slower-than-forecast quarterly revenue and said second-quarter revenue will miss expectations.
Among retail stocks, Walgreens Co. lost 0.4% after the drug store chain reported a 6.5% rise in same-store sales in August.
Costco Wholesale Corp. fell 4% after the warehouse retailer missed estimates for August same-store sales.
Shares of Mattel Inc. were down 0.9% after its third recall of toys made in China, and Guess Inc. was off 4.9% after it forecast fiscal-year end earnings at the low-end of forecasts. .
Crude-oil futures barely budged, struggling to hold ground above the $75 level after reaching a one-month high the prior day. Crude futures were up 22 cents at $75.30 a barrel, with uncertainty ahead of the latest weekly U.S. supply data, due out Thursday owing to the Labor Day holiday, keeping prices in a tight range. .
The dollar fell against its major rivals amid concerns about the broader economy, with the greenback sliding 1.1% against the Japanese currency at 115.17 yen. The euro gained 0.32% at $1.3666.
As stocks fell, Treasurys gained, pushing yields lower, with the benchmark 10-year note, a reference for mortgage and corporate borrowing, up 17/32 at 102 3/32 with a yield of 4.480%. .
And, copper proved the biggest loser among the metals futures as a decline in pending home sales sparked worries about a decline in construction demand for the metal, with copper for December deliver falling 1.3% to close at $3.263 an ounce. .
By Kate Gibson