Bears Maul Wall Street

Updated from 4:11 p.m. EST

Stocks in New York closed deep in negative territory Wednesday following dour economic comments from the Federal Reserve chief, further data pointing to a U.S. slowdown and more bad news from the financial industry.

The Dow Jones Industrial Average plunged 306.95 points, or 2.46%, to 12,159.21, its lowest close since March 16 of last year. Each of the Dow's 30 components finished with losses, led by 6% declines in Alcoa (AA Quote), Merck (MRK Quote), and AIG (AIG Quote).

The S&P 500 sank 39.95 points, or 2.91%, at 1333.25, and the Nasdaq Composite tumbled 47.69 points, or 1.99%, to 2346.90.

The major averages have now suffered a three-day decline that has cut the Dow by 4.8%, the S&P 500 by 5.9%, and the Nasdaq by 5.3%. The Dow has fallen 2,005 points, or 14.1%, since recording its record close on Oct. 9.

Financials were the biggest lag on the market following news of a massive loss at Merrill Lynch (MER Quote) and potential ratings trouble for bond insurer Ambac(ABK Quote), which could further roil the mortgage market.

The Amex Securities Broker/Dealer Index dropped 5.5%, the KBW Bank Index lost 4.7%, the Nasdaq Financial 100 Index was down 3.9%, and the NYSE Financial Sector Index fell 3.3%.

Breadth was dismal and volume was heavy. On the New York Stock Exchange, 5.48 billion shares changed hands, as decliners topped advancers by more than a 5-to-1 margin. Volume on the Nasdaq reached 2.76 billion shares, with losers beating winners roughly 4 to 1.

The broad market turned south after Fed Chairman Ben Bernanke, speaking before Congress about his economic outlook, provided a downbeat forecast that overshadowed his support for stimulus. The Fed is holding a two-day meeting at the end of the month, and most traders are already expecting a 50-basis point reduction in the fed funds rate.

During his remarks, the central bank chief said financial conditions continue to pose a threat to the economy and that "additional policy easing may well be necessary" because the outlook for activity in 2008 has worsened. The "downside risks to growth have become more pronounced," he said.

Echoing his comments of last week, Bernanke said that if required, policy makers will "take substantive additional action" to support growth and protect against a downturn.

Paul Mendelsohn, chief investment strategist with Windham Financial, said that Bernanke indicated the Fed finds no immediate need to cut rates, something the market was unhappy with.

"For now, he's attempting to calm the fears and keep the market from talking itself into a recession," said Mendelsohn. "He doesn't want to provide too much liquidity, but he has to provide enough that the Fed is still in control."

Robert Pavlik, chief investment officer with Oaktree Asset Management, said that a 50-basis-point cut from the Fed may not be enough to spur buyers as the economic picture worsens.

"We now need a much larger rate cut than is already baked in to stop this slide from going lower," said Pavlik. "It feels like traders have thrown in the towel. It takes a lot of discipline to hit the sell button, even on some of the high-quality names. Eventually we'll find a bottom and focus will begin to change, but for now this is a dramatic loss of capital."