In prepared testimony to the Joint Economic Committee of Congress, Bernanke said the economy faces risks from the housing market slump as well as from a possible surge in inflation, the lower dollar and higher oil costs. .
"We would view this as an attempt by Bernanke to keep all of the FOMC [Federal Open Market Committee]'s options on the table for December," said Drew Matus, senior economist, Lehman Brothers.
"It appears that the financial markets are cherry picking those remarks to support hopes of further easing. However, Bernanke noted that data subsequent to the Oct. 31 rate cut have continued to suggest the overall economy has remained resilient," said analysts at Action Economics. "Meanwhile, sharp increases in crude oil have put renewed upward pressure on inflation, and may impose further restraint on economic activity."
The Dow Jones Industrial Average had fallen 84 points by midday to 13,216, with 18 of its 30 components lower. American International Group Inc. and IBM fronted the slide, with those stocks down about 4% each.
The S&P 500 fell 7.23 points to 1,468.39, while the Nasdaq Composite fell 44.77 points to 2,703.99.
Investors seemingly brushed aside early economic data, with the government reporting the number of U.S. workers filing for first-time jobless benefits fell by 13,000 last week to 317,000, its lowest level in a month. .
Volume on the New York Stock Exchange topped 793 shares, with decliners ahead of advancers roughly 8 to 7. On the Nasdaq, more than 1.3 billion shares were exchanged, and declining stocks ahead of those advancing 5 to 4.
Ford posted a third-quarter loss of $380 million, or 19 cents a share, less than a loss of 46 cents a share expected by analysts. Shares of the automaker gained about 2%.
Cisco Systems Inc. shares fell 6.7% after it reported late Wednesday a 37% increase in first-quarter profit yet still sparked concern with a forecast implying that it won't meet Wall Street expectations for the current quarter. .
Within the Dow, shares of American International Group Inc. fell to lows not seen for more than a year. Late Wednesday, the insurance giant reported a 27% drop in third-quarter net income, with fallout from the subprime mortgage crisis pushing its results below expectations.
Morgan Stanley also offered bearish results late Wednesday, with the investment bank saying it would take another $3.7 billion hit to account for exposure to subprime-mortgage securities. .
"The markets' deep concern for credit and the companies that extend it is well-founded and isn't being ignored. The financial-services industry is going through some tough times, and that can't help but to extend to just about every corporation and household that borrows money," said Kevin Giddis, managing director for fixed income at Morgan Keegan & Co.
Retailers offered the worst October sales results in 12 years, hurt by unseasonably warm weather, record-high oil prices and consumer worries about the housing and credit markets.
Wal-Mart reported same-store sales rose 0.7% in October, less than the 1.1% hike anticipated by analysts.
Rival Target Corp. said same-store sales climbed 4.1% last month, topping expectations that called for a 2.5% rise.
Warehouse-club retailer Costco Wholesale Corp. reported a 9% jump in sale-store sales, topping the 5.7% consensus estimate of analysts polled by Thomson Financial.
Limited Brands Inc. said sales fell 6% last month, more than the 1.6% drop expected by analysts.
Outside the U.S., global miner BHP Billiton Ltd. said it approached Rio Tinto PLC with a offer to buy its smaller rival, but Rio Tinto had rejected the proposed deal, which could be worth more than $110 billion.
In futures trading on the New York Mercantile Exchange, the benchmark crude-oil contract fell 16 cents to $96.21 a barrel. .
Gold futures rose sharply, with the contract for December delivery up $7.20 to $840.70 an ounce. .
The dollar fell after Bernanke's testimony. The dollar index, which measures the U.S. currency against a basket of key currencies, was down 0.1%. The euro rose to $1.4691 from $1.4632 in late U.S. trading Wednesday. .
Treasurys were mixed, with short-term yields falling and long-term yields rising. The benchmark 10-year note up 7/32 to 99 21/32, as its yield nosed up to 4.293%. .
Overseas, European shares were mixed, with losses in the banking sector keeping broader market sentiment in check. .
Asian markets skidded lower, with weakness in Hong Kong fronting the sell-off. .
By Kate Gibson