Dow Sinks 508 Points as Credit Fears Persist

Updated from 4:08 p.m. EDT

Stocks fell in the final hour of trading to finish with brutal losses Tuesday after Federal Reserve Chairman Ben Bernanke pointed to increased downside risk for the U.S. economy and hinted that the central bank may reduce its target interest rate. A crisis of confidence in the financial system and choked lending markets lent weight to the selloff.

The Dow Jones Industrial Average lost 508.39 points, or 5.1%, to 9447.11, its first dip below 9500 since October 2003. The S&P 500 was off 60.66 points, or 5.7%, to 996.23, trading below the 1,000-point mark for the first time in five years. The Nasdaq lost 108.08 points, or 5.8%, to 1754.88.

Addressing the National Association for Business Economics in Washington, D.C., Bernanke said that the outlook for inflation has for the moment improved while growth potential has diminished, and said the bank would need to reconsider its current policy, a hint that his agency may soon cut its target interest rate.

Earlier, the Fed announced the creation of a new lending facility to buy short-term commercial paper from businesses and said it expects the new lending program to remove the stoppage in the credit markets.

The Fed's decision to begin buying commercial paper is "a radical change in the nature of the Fed," said Dirk Van Dijk, director of research at Zacks Equity Research. He said that the Fed is now essentially making unsecured loans to corporations. "The commercial paper market was the most constipated of all the financial markets," said Van Dijk. Getting commercial paper moving makes some sense, he said, although the actual impact of the Fed's move remains to be seen.