Global Recession Fears Hammer Stocks

Overseas, European indices, such as London's FTSE and Frankfurt's DAX, were falling sharply. In Asia, the Nikkei in Japan and the Hang Seng in Hong Kong closed with significant losses.

The foreign exchange market was seeing monumental moves in some cases, with the dollar registering significant changes against its major counterparts. The euro was losing 1.3% to $1.29, and the pound was sinking 1.7% to $1.58. The Australian dollar was off 5.1% against the greenback.

However, the dollar was surrendering 1.9% to the yen.

Lending markets slowed a trend of loosening that had emerged in previous sessions. Three-month dollar Libor, a measure of the rate banks charge one another for large loans, was down slightly at 3.52%. The cost of overnight borrowing rose 7 points to 1.28%.

In company news, PNC Financial Services (PNC Quote) and National City (NCC Quote) announced a merger agreement. PNC will buy National City for $5.2 billion, $2.23 a share in a cash-and-stock deal. PNC said that as part of the deal it sold $7.7 billion in preferred stock and related warrants to the government.

Separately, U.K. insurance firm Prudential(PUK Quote) was considering the purchase of segments of struggling U.S. insurer AIG(AIG Quote). AIG has been attempting to sell parts of its asset portfolio to avoid going bankrupt.

As for corporate earnings, following Thursday's close software titan Microsoft(MSFT Quote) reported results that beat estimates but issued a cautious revenue forecast for the coming quarter.

Looking at the day's economic data, the National Association of Realtors said that September existing-home sales increased 5.5% to an annualized rate of 5.18 million. Economists were expecting 4.95 million.