Stocks began the fourth quarter with a slide as pessimism about the economy gripped investors.
The Dow Jones industrial average and the Standard & Poor's 500 index posted their biggest drops in three months after reports on manufacturing and the labor market rattled the market, overshadowing good news on housing and. The Dow tumbled 203 points and bond prices jumped as investors sought a safer place for their money.
It was the sixth drop in seven days for stocks and another reminder of how fragile the market's 50 percent gain since March has become. The mixed economic reports added urgency to questions about how strong the recovery really is, and racheted up investors' anxiety ahead of the Labor Department's closely watched monthly jobs report on Friday.
"Fear is still very, very fresh in people's minds and the magnitude of the potential disaster that we had last September through March, I think still has investors pretty skittish," said Darell Krasnoff, managing director of Bel Air Investment Advisors in Los Angeles. "So our sense is that some bad news can shift sentiment pretty quickly."
The stock market's mood darkened after the Institute for Supply Management said its index of manufacturing activity in September slipped to 52.6 from 52.9 in August. The number fell short of analysts' expectations.
Worries about the still-troubled employment sector grew after the Labor Department said new claims for jobless benefits rose last week to 551,000. Economists polled by Thomson Reuters had predicted claims would come in a 535,000.
The increase broke a string of three straight weekly drops and added to worries about the monthly jobs report, which carries more weight with investors because it is less volatile than the weekly readings.
Economists predict that unemployment, which stands at a 26-year high of 9.7 percent, will rise to 9.8 percent for September. Most analysts expect the rate to top 10 percent by early next year. Economists are hoping the pace of job cuts will slow, however. Employers are expected to have cut 180,000 jobs in September compared with 216,000 in August.
Christian Bendixen, director of technical research at Bay Crest Partners LLC in New York, said recent economic numbers have reminded investors that a recovery in the economy will be difficult.
"For the first time in a while they're coming in a little bit lower than expectations and I think that's scaring a few investors," he said.
According to preliminary calculations, the Dow fell 203.00, or 2.1 percent, to 9,509.28. The drop was the biggest fall for the Dow since July 2, when it fell 223 points, or 2.6 percent, after the government said the nation's unemployment rate had reached the highest level in decades.
The broader Standard & Poor's 500 index fell 27.23, or 2.6 percent, to 1,029.85, and the Nasdaq composite index dropped 64.94, or 3.1 percent, to 2,057.48.
The Russell 2000 index of smaller companies fell 20.53, or 3.4 percent, to 583.75.
Five stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.6 billion shares compared with 1.8 billion Wednesday.
Bond prices jumped as investors sought safety, sending the yield on the 10-year Treasury note down to 3.19 percent from 3.31 percent late Wednesday.
Several economic reports this week have raised doubts about the strength of the recovery and whether the market rally should continue. The Dow fell about 30 points Wednesday following a disappointing report on Midwestern manufacturing.
Despite ending on a wobbly note in September, stocks still put in a stellar third quarter. Both the Dow and the S&P 500 index gained 15 percent. It was the Dow's best quarter in nearly 11 years.
Not all the economic news on Thursday was negative. The Commerce Department said consumer spending surged by the largest amount in nearly eight years in August, even as personal income growth lags. Consumer spending rose 1.3 percent and incomes edged up 0.2 percent.
Even so, economists worry whether that rebound can be sustained with U.S. households facing rising unemployment and tight credit conditions.
Spending got a temporary boost from the government's Cash for Clunkers program. Major automakers on Thursday posted big drops in September sales following the government's incentive program in July and August.
Meanwhile, the National Association of Realtors said pending home sales in August rose 6.4 percent from July to 103.8. Economists surveyed by Thomson Reuters expected the index would rise to 98.6.
The dollar mostly rose against other major currencies, while gold slid.
Light, sweet crude rose 21 cents to settle at $70.82 a barrel on the New York Mercantile Exchange.
Overseas markets fell, even as the International Monetary Fund said the global economy is recovering faster than expected, but warned it will be a sluggish rebound.
Britain's FTSE 100 fell 1.7 percent, Germany's DAX index slid 2.1 percent, and France's CAC-40 lost 2 percent. Japan's Nikkei stock average fell 1.5 percent.