U.S. Stocks Fall Steeply As Economic Fear Trumps Rescue Vote

NEW YORK (MarketWatch) -- Stocks fell steeply Thursday, with concerns about the economy returning to the fore as rising jobless claims and plunging factory orders offset hopes that the $700 billion financial-bailout plan will pass Congress after being approved by the Senate.

"Even though there's fear out there that they may temper or reject the bill, the market's decline today is on the back of dismal economic numbers," said Peter Cardillo, market economist at Avalon Partners.

Crude-oil prices slid 4.1% to $94.45 a barrel, and the energy sector stumbled 7.2% in the broader market.

The rise in jobless claims ahead of Friday's employment report for September "suggests the economy is now on a slippery road toward a consumer-led recession," Cardillo said.

The Dow Jones Industrial Average was down 287 points, or 2.7%, to 10,545, with 26 of its 30 components trading lower.

Exacerbating worries about the economy, Marriott International warned next year's profit may fall as quarterly net income dropped nearly 30%.

"We're also approaching earnings season," Avalon's Cardillo said. "And negative announcements are likely to weigh on equities in the short term."

The shares of firms benefiting from global growth, such as Alcoa Inc. and Caterpillar Inc. , led the declines among blue chips, with the aluminum giant's stock off 8% and the equipment maker's stock down 6%.

General Electric's stock fell 9%. Its shares came under pressure Wednesday amid concerns about its financial arm. It also announced a $12 billion public offering to be priced Thursday, and an investment from billionaire Warren Buffett.

Away from the Dow, ConocoPhillips , the No. 3 U.S. oil major, said it sees lower prices for crude and natural gas in the third quarter and refining margins falling worldwide.

Separately, Merrill Lynch cut its 2009 oil price forecast to $90 a barrel from $107 a barrel and warned that a "synchronous global recession" could bring oil prices to $50 a barrel.

Crude futures last traded down $4.22, or 4.3%, at $94.31 a barrel.

The S&P 500 index fell 36 points, or 3.2%, to 1,124. By sector, energy led the declines, slumping 8.7%, followed by industrials, off 5%, and materials, down 5.3%.

The financial sector was among the sectors performing the least badly, down 3.5%, after the Securities and Exchange Commission extended its ban on short selling to as long as Oct. 17, or up to three business days after the passage of the bailout plan, but won't make it permanent.

The Nasdaq Composite lost 71 points, or 3.4%, to 1,997.

Trading volumes showed 744 million shares exchanging hands on the New York Stock Exchange, and 437 million trading on the Nasdaq stock market. Advancing issues topped decliners by 5 to 1 on the NYSE and by 4 to 1 on Nasdaq.

Jobless claims rise

Jobless claims remained at their highest level in seven years, the Labor Department reported Thursday, as people in the hurricane-hit states of Louisiana and Texas filed for benefits. For the week ended Sept. 27, seasonally adjusted first-time claims for unemployment benefits rose 1,000, to 497,000 -- the highest level since late September 2001.

Meanwhile, the Commerce Department reported factory orders for August fell 4%, the biggest such drop in two years.

The claims data also come on the eve of pivotal Labor Department data on the nation's nonfarm payrolls and the unemployment rate for September.

The dollar rallied sharply, especially against the euro, as European Central Bank President Jean-Claude Trichet acknowledged a deteriorating European economy and that the ECB had considered cutting interest rates. The central bank, however, kept rates steady at 4.25% Thursday.

The euro touched a one-year low against the dollar.

Bailout hopes

The Senate fairly easily approved a revised $700 billion U.S. plan to stabilize the financia industry, just two days after the House of Representatives rejected it.

"The initial market response has been mixed, with the bill still facing another vote in the House, likely on Friday," said Robert Kavcic, an economist at BMO Capital Markets, in a note.

The revamped Senate bill sticks to the core plan developed by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to have the government buy and hold toxic mortgage assets, freeing up funds for banks to begin lending again.

It gives Paulson the $700 billion in phases, with $250 billion up front, then $100 billion pending presidential approval and another $350 billion pending congressional approval.

UBS , the Swiss bank that's sustained big losses arising from the subprime crisis, said it would return to profit in the third quarter after substantially reducing its exposure to U.S. commercial and residential mortgages.

Elsewhere, Eli Lilly is the unnamed pharmaceutical giant behind a $6.1 billion bid for ImClone Systems , according to a Wall Street Journal report. ImClone, without identifying the firm, said that due diligence has been completed and that a proposal not subject to financing has been tendered.

Deal speculation also swirled around Constellation Energy Group , which reportedly may receive a counter bid from EdF, the French electricity giant.

By Nick Godt