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Slowdown Fears Batter Stocks

Merrill and Citigroup fall on a brutal day for Wall Street's major averages.

Updated from 4:19 p.m. EST

Stocks in the U.S. sank Tuesday as sluggish earnings and additional evidence of slowing consumer spending sent the major averages to their lowest closing levels since last spring.

The

Dow Jones Industrial Average

tumbled 277.04 points, or 2.17%, to 12,501.11. It was the largest point decline for the Dow in a month and its worst closing level in nine.

The

S&P 500

dropped 35.30 points, or 2.49%, to 1380.95, while the

Nasdaq Composite

slid 60.71 points, or 2.45%, to 2417.59.

"It's unfortunate that there was a perfect storm of financials and economic data that sank stocks today," said Art Hogan, chief market analyst with Jefferies. "We may not have this battering every day, as we're pricing in a lot of bad news now."

Volume was strong while breadth was weak. On the

New York Stock Exchange

, 4.49 billion shares changed hands, as decliners beat advancers by a 3-to-1 margin. Volume on the Nasdaq reached 2.34 billion shares, with losers beating winners 3 to 1.

Wall Street's downside bias was evident even before the market opened, and when

Citigroup

TheStreet Recommends

(C) - Get Citigroup Inc. Report

kicked off the news day, it did nothing to change that. Citi had a fourth-quarter loss of $9.83 billion, or $1.99 a share, nearly doubling the Thomson First Call average estimate.

The greater-than-expected loss came after the company recorded a pretax writedown of $18.1 billion because of the subprime mortgage mess. Citi also reduced its dividend by 41% and said it has received a $12.5 billion cash investment from outside investors.

Citi shed $2.12, or 7.3%, to $26.94, making it the worst-performing Dow component.

At the same time,

Merrill Lynch

(MER)

said it has received a $6.6 billion injection from mostly foreign investors. Merrill, which will post quarterly results Thursday morning, was down $2.96, or 5.3%, to $53.01.

"The silver lining is that these lenders look to be getting all the losses off the books and that they are trying to raise capital," said Kenny Landgraf, president and founder of Kenjol Capital Management. "However, it seems like every time we get banking news there is no support for the market. The positive news doesn't carry the same weight as negative news."

Traders were also disappointed by earnings reports from

U.S. Bancorp

(USB) - Get U.S. Bancorp Report

and

State Street

(STT) - Get State Street Corporation Report

, both of which reported earnings that declined from a year ago and fell short of consensus targets. U.S. Bancorp tacked on 0.3% after beating estimates, while State Street lost nearly 6%.

Financial subsector indices were among the worst performers of the session. The Amex Securities Broker/Dealer index lost 4.3%, the NYSE Financial Sector index shed 3.6%, and the Nasdaq Financial 100 index slid 2.9%.

Among other individual decliners,

E*Trade Financial

(ETFC) - Get E*TRADE Financial Corporation Report

dropped 9.9%,

Lehman Brothers

(LEH)

lost 5.9%, and

Bear Stearns

(BAC) - Get Bank of America Corp Report

closed 5.2% lower.

New merger partners

Bank of America

(BAC) - Get Bank of America Corp Report

and

Countrywide

(CFC)

fell 3.4% and 3.6%, respectively.

A torrent of economic releases also spooked buyers. The Commerce Department said retail sales fell 0.4% in December, worse than expectations of a 0.1% increase. Both October and November were revised lower by 0.2%. Excluding autos, sales declined 0.4%, also missing expectations.

"Overall consumption is unlikely to fall outright, but higher prices for energy and food, together with falling confidence, are hammering discretionary spending," said Ian Shepherdson, chief economist with High Frequency Economics.

Philip Roth, chief technical market analyst with Miller Tabak, said traders appeared to have been caught off guard by both Citigroup and weak retail sales, which he said "points out that people have been naïve about both. Bad news can't be ignored today. There could still be another decent down move to this correction."

In a separate report, the Labor Department said its producer price index unexpectedly fell 0.1% last month, as economists anticipated a 0.2% increase. The core number, a key measure of inflation and one that excludes food and energy, rose 0.2%, as anticipated.

"The pressure on core PPI is now fading," said Shepherdson. "The slowing in the rate of increase of core raw materials prices means that core PPI inflation will be well below 2% a year from now. There is no inflation threat in domestically produced goods prices."

Also on the economic docket, the Census Bureau said business inventories rose 0.4% in November, in line with forecasts. Additionally, the New York

Federal Reserve

said its Empire State manufacturing index unexpectedly fell to a reading of 9 this month from 9.8 in December. Economists had predicted a slight increase to 10.

Meanwhile, former Fed Chairman Alan Greenspan said in an interview with

The Wall Street Journal

that the U.S. is in or about to enter a recession.

"The symptoms are clearly there. Recessions don't happen smoothly. They are usually signaled by a discontinuity in the market place, and the data of recent weeks could very well be characterized in that manner," said Greenspan.

U.S. Treasury bonds, viewed as a safe haven in times of economic turmoil, rallied. The 10-year note rose 22/32 in price, yielding 3.69%. The 30-year bond added 1-9/32 in price, yielding 4.29%. The dollar was losing ground against the world's major currencies.

In other corporate news, shares of tech giants

Intel

(INTC) - Get Intel Corporation Report

and

Apple

(AAPL) - Get Apple Inc. Report

were in focus during the session.

Apple CEO Steve Jobs delivered his keynote address to the Macworld Conference and Expo in San Francisco, unveiling the MacBook Air laptop and a new movie rental distribution through its iTunes software. Apple tumbled $9.75, or 5.5%, to finish at $169.04 following the address.

Intel was out with earnings after the close, and its results fell short of the Thomson First Call average earnings and revenue targets. Shares of Intel slid 13% in late trading after slipping 1.7% to $22.69 in the regular session.

Away from equities, commodity futures were mixed. Oil dropped $2.30 to close at $91.90 a barrel. Gold surged early but finished with a loss of 80 cents at $902.60 an ounce.

Overseas markets were uniformly lower. Overnight in Asia, Japan's Nikkei 225 fell 1%, and Hong Kong's Hang Seng was lower by 2.4%. In Europe, London's FTSE 100 slipped 3.1%, and Germany's Xetra Dax was lower by 2.1%.