NEW YORK (

TheStreet

) -- Investors fled to safer assets like the U.S. dollar and Treasury securities Wednesday, sending stocks sharply lower as the market interpreted the

Federal Open Market Committee's

decision to reinvest proceeds from maturing mortgage-backed securities in U.S. Treasuries as a loss of confidence in the economic recovery.

The

Dow Jones Industrial Average

lost 265 points, or 2.5%, to close at 10,379. The

S&P 500

shed 32 points, or 2.8%, to finish at 1089 and the

Nasdaq

closed lower by 69 points, or 3%, at 2209.

The

New York Federal Reserve

also unveiled a schedule for the reinvestment plan, saying the bank would buy up about $18 billion in Treasuries through the middle of September.

Yields on 10-year U.S. Treasury sank to a low not seen since March 2009 following the Fed's decision to purchase more Treasury securities.

"The bond market has been a consistent and correct voice in the market," said Len Blum, managing partner at Westwood Capital. "It's been telling us for a some time that there are no inflationary pressures, and, in fact, there may be more deflationary pressures. It certainly continues to be a reasonable investment since there aren't many risks to the downside. The only thing that would cause yields to increase would be inflationary pressures, and I just don't see that happening,"

Blum also said his overall view of the economy hasn't changed.

"Some of the problems that got us into the recession are still lingering, so everything isn't fixed. Meanwhile we still have a very damaged consumer, Washington's stimulus has burned off and they don't have a lot of options left in their toolkit. Plus, banks continue to be saddled with bad assets and aren't lending."

"What's happening is that every time the market tries to advance a little, the fundamentals come back and rear their ugly head," he said, adding, "While we're not likely to experience a double-dip, we will experience slow growth that will be painful."

Global markets tumbled on the Fed's weaker economic outlook, and the

Bank of England gave one of its own, saying the U.K. recovery will likely continue at a slower pace than it previously forecast.

Meanwhile, China's National Bureau of Statistics said its

consumer price index rose 3.3% year over year in July as food prices jumped 6.8% because of heavy flooding in the country.

Overseas, Hong Kong's Hang Seng declined 0.8%, and Japan's Nikkei lost 2.7%. The FTSE in London was shed 2.3%%, and the DAX in Frankfurt lost 2.1%.

The Economy

The U.S. international trade gap unexpectedly widened to $49.9 billion in June, rising 19%, according to the Department of Commerce's report. Economists had expected it to narrow to $42.2 billion, according to Briefing.com.

The Energy Information Administration said crude oil inventories shed 3 million barrels in the week ended Aug. 6, surpassing expectations for a drawdown of 2.4 million barrels, according to a Platts poll of analysts.

The drop also exceeded the decline of 2.19 million barrels reported by the American Petroleum Institute late Tuesday. Meanwhile, gasoline stocks upset expectations for a decline of 1.5 million barrels by adding 409,000 barrels, and distillates rose by a higher-than-expected 3.5 million barrels. Analysts had been anticipating an increase of 1.1 million barrels, according to Platts.

The U.S. Treasury Department said the federal budget deficit narrowed to $165 billion in June, down from a deficit of $180.7 billion at the same time last year, and better than projections calling for the deficit to fall to $169 billion.

Company News

After the bell,

Cisco

(CSCO) - Get Report

said it earned an adjusted 42 cents a share during the fourth-quarter, just barely edging past bottom-line estimates by a penny. But sales came up lighter than expected, with revenue at $10.8 billion. Shares were selling off nearly 5% in extended-hours trading.

All 30 Dow components closed in the red, with

Alcoa

(AA) - Get Report

,

Boeing

(BA) - Get Report

and

DuPont

(DD) - Get Report

finishing the session as the biggest laggards.

Meanwhile,

Procter & Gamble

(PG) - Get Report

,

Microsoft

(MSFT) - Get Report

and

Travelers

(TRV) - Get Report

were the components with the mildest losses.

On the

New York Stock Exchange

, 82% of stocks were on the decline, compared with only 16% of stocks seeing gains, according to Yahoo! Finance.

Shares of

Ameristar Casinos

(ASCA)

soared 12.2%, to $16.27 after a

New York Post

report suggested that it may be putting itself up for sale.

Macy's

(M) - Get Report

topped analysts' estimates for a earnings of 29 cents a share with a second-quarter profit of 35 cents a share and said sales rose 7% to $5.54 million. Same-store sales also grew, by 4.9%. The department store also hiked its year-end earnings guidance to a range of $1.85 to $1.90 a share, from a range of $1.75 to $1.80 a share, previously. The stock rose 6%, to $20.55.

Shares of

IAM Gold

(IAG) - Get Report

dropped 3.1%, to $17.33 after the Canadian mining company missed analysts' estimates by 4 cents and said sales slipped 5% to $214 million. The company also increased its 2010 gold production targets to a range of 980,000 ounces to 1 million ounces at a cash cost of between $530 and $550 an ounce.

ING Group

(ING) - Get Report

reported second-quarter net income of €1.090 billion ($1.43 billion) from €71 million, previously, and surpassed Wall Street's expectations. Shares fell 4.9%, to $9.52.

Nestle

(NSRGY) - Get Report

said net profits rose 7.5% in the first half of 2010 but warned that the second half of the year will likely be a challenging environment for cost inputs.

A day after Saudi Arabia's telecom regulator said it will allow BlackBerry service to continue,

Research In Motion

(RIMM)

is dealing with a possible halt on services in India because of security concerns. RIMM shares finished ahead by 0.5%, to $56.19.

In deals news,

Green Mountain Coffee Roasters

(GMCR)

said late Tuesday that Italian coffee roaster and seller Luigi Lavazza agreed to take a $250 million stake in the company. The purchase is equivalent to roughly 7% of Green Mountain's current outstanding shares and 7.5% below the 60-day volume weighted average price. Green Mountain's stock slipped 1.5%, to $30.99.

Late in the day,

CNBC

reported

General Motors

will file for IPO registration on Friday.

Commodities and the Dollar

Following the EIA report, crude

oil for September delivery fell $2.23 to settle at $78.02 a barrel.

Elsewhere in commodity markets, the December gold contract gained $1.20 to settle at $1,199.20 an ounce.

The dollar was trading higher against a basket of currencies, with the dollar index up by 1.7%.

Treasuries

Treasuries and related ETFs were in higher demand a day after the Fed signaled it would purchase more U.S. Treasury securities to help bolster the economic recovery.

On Wednesday, the U.S. Treasury auctioned $24 billion of 10-year notes with a high yield of 2.730%. The bid-to-cover ratio was 3.04, which compares to a recent average of 3.06, according to

CNBC

.

The benchmark 10-year Treasury was up by 23/32, diluting the yield to 2.687%.

The two-year note was higher by 1/32, lowering the yield to 0.513%. The 30-year bond was up by 1 17/32, weakening the yield to 3.925%.

--Written by Melinda Peer and Sung Moss in New York

.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.