Updated from 3:29 p.m. EST

Stocks in the U.S. got walloped Wednesday, closing with discouraging losses after Treasury Secretary Henry Paulson proposed new ways to spend the Troubled Asset Relief Program's remaining funds, retailers offered cringe-worthy sales forecasts and Congress looked at a potential bailout for the sickly auto sector.

The

Dow Jones Industrial Average

lost 411.30 points, or 4.7%, to 8331.24, and the

S&P 500

gave back 46.65 points, or 5.2%, to 852.30. The

Nasdaq

slid 81.69 points, or 5.2%, to 1499.21.

The status of programs to quell turmoil in the financial space was occupying investor attention.

The Wall Street Journal

reported ahead of Wednesday's session that the Treasury may begin to require companies to raise private money before gaining access to the $700 billion

Troubled Asset Relief Program

.

The

Journal

also reported that

American Express

(AXP) - Get Report

, which on Monday had become a

bank-holding company

and thus eligible for funds from the

Federal Reserve

, was attempting to get $3.5 billion in capital injections from the government. American Express shares dropped 10% to $20.05.

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Paulson, speaking in Washington Wednesday morning, offered an update on the state of the TARP. "We have taken the necessary steps to prevent a broad systemic event," said Paulson, but he cautioned that the financial system remains fragile and turmoil in the markets will not abate until the housing correction resolves itself. He proposed a broad expansion of the use of TARP funds, and that non-banks may also need access to emergency funding.

Paulson also said that remaining TARP funds will be used to target ailing consumer financing markets and support homeowners facing foreclosure.

Propping up consumer financing arms of large manufacturing companies such as

General Motors

(GM) - Get Report

,

Ford

(F) - Get Report

and

General Electric

(GE) - Get Report

is an effort to stave off bankruptcy, said Matthew Smith, president of Smith Affiliated Capital.

Smith said bankruptcy would allow the profitable arms of such companies to keep going, while sloughing off the parts that are losing money. If the government intervenes to stave off bankruptcy, "Effectively they're allowing these businesses to keep on existing in the state they are. And it ends up being a zombie state. It's almost self-defeating, the fact that you're going to supply money to the financial arm. Trying to sell cars and machinery in a recession, it doesn't make sense," he said.

Mark Pado, U.S. market strategist for Cantor Fitzgerald, said that Paulson had to alter the initial TARP plan to buy troubled assets from financial institutions because Congress waited too long to pass the bailout legislation. If the Treasury had been able to get troubled assets off banks' balance sheets before the end of the third quarter, the government wouldn't have had to resort to recapitalization, he said. "It was too late by the end of September," he said.

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As for bolstering consumer credit facilities, "I think that it's all intertwined," said Pado. "We relate this to being a housing issue but it's really a leverage issue." Pado said that he understands the free-market impulse to let businesses that made bad loans go under, but with credit markets this frozen, allowing consumer-finance institutions to go under would deny borrowers another needed source of lending.

"If you haven't got a single operation that's working properly, and you're going to take away one more, then the pain is too great," said Pado. "Right now it would just add to the burden on the system."

Meanwhile, a report by

Bloomberg

indicated the Fed is attempting to become the main regulator for the credit-default swaps market. The Fed and other government agencies are working to develop a clearinghouse for the $33 trillion CDS market.

In a further sign of trouble in the financial sector,

Reuters

reported that

Morgan Stanley's

(MS) - Get Report

chief financial officer said the company would lower its headcount by 9% after already cutting jobs 10% earlier this year. Morgan Stanley shares plummeted 15% to $11.94.

The government also was moving toward aid for the automakers.

House Speaker Nancy Pelosi

suggested financial assistance for the industry, which includes General Motors, Ford and

Chrysler

. Rep. Barney Frank said that his congressional panel would hold a meeting to discuss allocation of $25 billion in TARP funds to the automotive sector. GM and Ford last Friday announced troubling quarterly losses that led some to question the future viability of the U.S. auto sector.

GM gained 5.5% to $3.08, and Ford added 2.2% to $1.84.

In the energy sector,

Exelon

(EXC) - Get Report

announced it would take its buyout bid for

NRG Energy

(NRG) - Get Report

straight to shareholders after NRG on Monday rejected Exelon's offer. Exelon shares edged down 2.7% to $50.57, and NRG dropped 6.3% to $21.60.

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Staying on the merger front,

Anheuser-Busch

(BUD) - Get Report

shareholders approved sale of the beer developer to Belgian brewery

InBev

. Anheuser-Busch stock slipped 0.8% to $66.33.

As for technology companies,

Microsoft

(MSFT) - Get Report

is working on a deal with

Verizon

(VZ) - Get Report

to provide the default search software for Verizon Wireless' phones, according to a report by the

Journal

. Microsoft shares lost 4.3% to $20.30, and Verizon gave back 2.6% to $28.96.

Among corporate earnings,

Dutch financial firm ING

(ING) - Get Report

swung to a quarterly loss on losses related to the financial crisis. Shares fell 7.6% to $9.41.

In retail, department store operator

Macy's

(M) - Get Report

announced a third-quarter loss on declining sales. Elsewhere among merchants, electronics vendor

Best Buy

(BBY) - Get Report

, citing declines in consumer spending, lowered its earnings forecasts for the remainder of its fiscal year.

Macy's dropped 11% to $8.37, and Best Buy slumped 8% to $21.97.

Turning to economic forecasts, the Bank of England predicted a decline in Britain's inflation to below 2% next year, but also said that inflation could decline yet further on an economic downturn.

Looking at commodities, crude oil declined $3.17 to settle at $56.16 a barrel, as the

International Energy Agency

predicted global energy demand would rise 1.6% annually between 2006 and 2030 and called for new investments to avert a supply shortage. Gold was down $14.50 to close at $718.30 an ounce.

Longer-dated U.S. Treasury securities were rising in price. The 10-year was up 25/32 to yield 3.65%, and the 30-year was up 12/32, yielding 4.17%. The dollar was higher vs. the euro and pound but losing ground against the yen.

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Overseas, European exchanges, such as the FTSE in London and the DAX in Frankfurt, were trading lower. As for Asian markets, Japan's Nikkei and Hong Kong's Hang Seng closed on the downside.