The Dow Jones Industrial Average ended down 419.63 points, or 3.68%, to 10990.58. The Standard & Poor's 500-stock index dropped 53.24 points, or 4.46%, to 1140.65, while the Nasdaq Composite lost 131.05 points, or 5.22%, to 2380.43.
In the flight to safety Thursday, investors piled into gold, which jumped to a record of $1,818.90 a troy ounce. In the Treasurys market, the yield on the benchmark 10-year note briefly dipped below 2% in intraday trading for the first time since at least 1954, as investors sought refuge in U.S. debt.
"If it's not a recession, it sure feels like one. And if it feels like one, it doesn't matter if you can prove it with statistics or not," said John Hailer, president and CEO of Natixis Global Asset Management in the U.S. and Asia.
The heaviest selling came in energy and materials stocks, as commodities prices sank. Among Dow components, United Technologies fell $3.93 a share, or 5.5%, to $68.12; Alcoa lost 75 cents, or 6.1%, to 11.51; and Caterpillar tumbled 4.31, or 4.9%, to 88.33. Among big oil firms, Chevron lost 4.44, or 4.6%, to 93.24 and Exxon Mobil was off 3.22, or 4.3%, to 70.94.
Bank stocks were also under significant pressure. Bank of America was the biggest decliner among the Dow components, tumbling 45 cents, or 6%, to 7.01, while J.P. Morgan Chase lost 1.38, or 3.8%, to 35.19. Citigroup fell 1.87, or 6.3%, to 27.98 while Morgan Stanley declined 81 cents, or 4.8%, to 16.20.
"Investor nerves are raw," said John Lynch, chief investment officer for Wells Fargo Bank in the mid-Atlantic region. "A recession can become a self-fulfilling prophecy."
Hewlett-Packard, one of the biggest stock laggards on the day, briefly reversed its morning slump after reports that the world's biggest computer maker will spin off its personal-computer business and is close to a $10 billion deal to acquire U.K. software firm Autonomy. H-P, which took the unusual step of reporting quarterly earnings during trading hours, fell 1.88, or 6%, to 29.51 despite earnings and revenue coming in largely in line with analyst expectations.
Transportation stocks, which are particularly sensitive to economic growth concerns, were hit hard. The Dow Jones Transportation Average, an index of 20 railroad, airline and shipping stocks, tumbled 6.1%. American Airlines parent AMR fell 26 cents, or 6.8%, to 3.54; Kansas City Southern dropped 6.49, or 12%, to 47.47; and FedEx lost 4.67, or 5.9%, to 74.46.
All 10 sectors of the S&P 500 were lower, with 98% of the 500 component stocks falling. The CBOE Market Volatility Index, the "fear gauge" known as the VIX, surged 37%. With just minutes to go in trading, the Dow was near its intraday low, down 529 points, before snapping back to finish slightly higher.
Trading volumes were in line with recent trading days, which have seen a jump in activity. About 6.3 billion shares changed hands in New York Stock Exchange composite volume, well above the daily average this year of about 4.3 billion shares.
Relatively stronger were safe-haven stock sectors, with utilities, consumer-staples, telecommunications and health-care stocks the best performers of the day.
The U.S. declines came after sharp losses in European and Asian markets. The Stoxx Europe 600 slumped 4.8%, and Germany's DAX index plunged 5.8%. Asian bourses also fell; Japan's Nikkei Stock Index ended down 1.3%, to a five-month low, while China's Shanghai Composite declined 1.6%.
European banks led the declines, in part after The Wall Street Journal reported that U.S. federal and state regulators were intensifying their scrutiny of the U.S. arms of Europe's biggest banks, worrying about spillover from Europe's debt crisis into the U.S. banking system. Societe Generale fell 12% in Paris, Intesa Sanpaolo dropped 9.3% in Milan, and Barclays was off 11% in London.
Others pointed to Morgan Stanley, which late Wednesday cut its 2011 euro-area gross domestic product growth forecast to 1.7% from 2%, and its 2012 GDP growth forecast to 0.5%, from a previous estimate of 1.2%.
Adding to the gloom were discouraging economic reports that showed rising inflation and little traction on hiring. A reading of Philadelphia-area manufacturing plunged to negative-30.7 from 3.2 in July, the lowest reading in two years. Economists had been expecting a gain. Existing-home sales also tumbled 3.5% in July, defying hopes for a gain.
"If we had a strong economy, we could probably shrug off some of these Europe concerns, but the numbers are just showing complete stagnation--we've leveled off and there doesn't seem to be continual improvement," said Randy Frederick, director of trading and derivatives for Charles Schwab.
Quincy Krosby, market strategist at Prudential Financial, said that the return of violent stock market swings over the past few weeks are "indicative of a bear market, not a bull market."
"The euro sovereign debt issues, coupled with increasing concerns over global growth, particularly with the U.S. data today, makes for a nasty, nasty market," Ms. Krosby said. "The market is craving a policy response. We're in a season of volatility and we don't see a policy response, either from the Europeans and in the U.S."
Following a week that saw European stocks rally on the heels of short-selling bans on the continent, investors took a more cautious view after German and French leaders failed earlier this week to come up with concrete proposals to more meaningfully address sovereign-debt problems.
Thursday's stock declines puts the major indexes deep into the red for the week, a day after the Dow had battled to a stalemate on Wednesday, edging up four points. The Dow is now off 9.5% for the month.
Gold futures benefited from safe-haven flows amid the uncertainty, while crude-oil futures tumbled 5.9% amid the economic concerns, to $82.38 a barrel. The euro fell against the dollar. Treasurys finished sharply higher, with the yield on the 10-year note finishing at 2.083%-- a nearly three-year low.
On the economic front, new jobless claims rose by 9,000 to 408,000 last week, the latest sign of a persistently weak U.S. labor market. Consumer inflation resumed its climb in July, as gasoline prices rebounded and food costs continued to rise. Consumer prices rose 0.5% from June, the largest monthly increase since March. On an annualized basis, consumer prices were up by 3.6% in July, above the Federal Reserve's target.
Mid-Atlantic manufacturing activity, meanwhile, contracted at a sharp pace in August, and expectations plummeted. The Philadelphia Fed said its index of general business activity within the factory sector fell to -30.7 this month, from 3.2 in July and -7.7 in June. Economists had expected a reading of 1.5 in August.
In corporate news, NetApp plunged 5.85, or 14%, to 35.81 to lead the S&P 500 decliners after fiscal first-quarter profit fell short of forecasts.
JDS Uniphase shed 1.49, or 13%, to 10.21 after issuing a lower-than-expected outlook for revenue.
Sears Holdings fell 4.91, or 8.2%, to 55.23 after the retailer's fiscal second-quarter loss widened amid added markdowns to clear seasonal inventory, which hurt sales and margins.
Ross Stores dropped 96 cents, or 1.3%, to 70.84 after the discount retailer projected per-share earnings below analysts' estimates and spoke cautiously about the second half of the year, citing uncertainty about how consumers will be affected by stock-market volatility and increased economic uncertainty.
Food company J.M. Smucker slumped 5.54, or 7.3%, to 70.02 after fiscal first-quarter earnings rose 8.4% but revenues fell short of analyst expectations.
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