Updated from 4:12 p.m. EDT

Stocks in the U.S. fell hard Tuesday after the minutes from the last

Federal Reserve

meeting failed to give investors any firm indication that the central bank is considering lowering interest rates.

The

Dow Jones Industrial Average

plunged 280.28 points, or 2.1%, to 13,041.85. The

S&P 500

lost 34.43 points, or 2.35%, to 1432.36, and the

Nasdaq Composite

was weaker by 60.61 points, or 2.37%, at 2500.64.

The major averages were underwater early in the session amid more bad news on the financial and housing sectors, but they went deeper into the red after the 2 p.m. EDT release of the minutes of the Aug. 7 Fed meeting.

During that gathering, the Federal Open Market Committee kept its fed funds target rate at 5.25% for the ninth straight time. The Fed said it remained focused on inflation but it altered its statement to note the recent credit crisis.

In the statement accompanying the rate decision, the central bank noted that "credit conditions have become tighter for some households and businesses, and the housing correction is ongoing."

The minutes indicated that members of the FOMC judged that risks were on the rise, saying that "conditions in markets for subprime mortgages and related instruments, including segments of the asset-backed commercial paper market, deteriorated sharply toward the end of the period."

The Fed also said that the worsening mortgage situation could lead to a housing slump deeper and more prolonged than it had seemed earlier this year.

"Participants noted that investors had become much more uncertain about the likely future cash flows from subprime and certain other nontraditional mortgages, and thus about the valuation of securities backed by such mortgages," the minutes said.

But the panel also reiterated its inflation concerns. "Readings on core inflation had improved modestly in recent months but did not yet convincingly demonstrate a sustained moderation of inflation pressures, and ... the high level of resource utilization had the potential to sustain inflation pressures," the Fed said.

"Against this backdrop, members judged that the risk that inflation would fail to moderate as expected continued to outweigh other policy concerns," the minutes added.

The meeting came before credit worries significantly worsened, leading the Fed to cut its discount rate -- the interest it charges on loans to banks -- by 50 basis points. Many market participants are hoping in a reduction for the fed funds target, possibly as soon as Sept. 18, when the FOMC next meets.

"This Fed is very different from the Alan Greenspan-era in that they're dealing with a liquidity crisis through the discount window," said Paul Nolte, director of investments with Hinsdale Associates. "It is this Fed's view that the economy is still OK and that the liquidity problem is restricted to the financial sector. These minutes have taken hopes of a rate cut at the September meeting away.

"The economy is still weakening and will warrant a cut eventually," added Nolte. "The Fed doesn't have tools to deal with this type of problem today, so it's hard to say the way they're dealing with this is the right way, and we won't know until six months to a year from now."

Elsewhere on the economic front, the Conference Board said its consumer confidence index slid to a reading of 105 in August, as expected, from a revised 111.9 in July.

Ian Shepherdson, chief economist with High Frequency Economics, said that the drop in consumer confidence was clearly foreshadowed by steep declines in the University of Michigan consumer sentiment index, and it may not be the end of the process.

"Both the headline and current conditions indexes plunged, almost exactly reversing their July gains," he said. "What the easing in gas prices did, the chaos in the markets undid. We expect a further modest decline in confidence over the next month or so as people see the loss of value in their mutual fund, 401(k) and brokerage statements."

Following by a day a report on existing-home sales, which fell 0.2% as inventories soared 5.1%, more bad news was pressuring the housing sector. The S&P/Case-Schiller Index of home prices showed a 3.2% drop during the second quarter, the biggest decrease since the index began 20 years ago.

Housing stocks

D.R. Horton

(DHI) - Get Report

,

Lennar

(LEN) - Get Report

,

Centex

(CTX)

and

Pulte Homes

(PHM) - Get Report

all finished down 3% or more.

The Dow has now dropped 338 points over the last two sessions, while the S&P 500 has given back 47 points and the Nasdaq has declined 76 points.

Breadth weakened considerably from the previous session. On the

New York Stock Exchange

2.74 billion shares changed hands, as decliners topped advancers by a 7-to-1 margin. Volume on the Nasdaq reached 1.56 billion shares, with losers outpacing winners nearly 4 to 1.

More bad news was weighing on the financial sector. The

Financial Times

said that

Barclays

(BCS) - Get Report

may have several hundred million dollars of exposure to troubled debt through links to German lender Saschen LB.

Barclays denied the report, but its shares lost $2.33, or 4.8%, at $46.61.

Elsewhere,

Citigroup

(C) - Get Report

,

Lehman Brothers

(LEH)

and

Bear Stearns

(BSC)

were all downgraded to neutral from buy by Merrill Lynch. All were lower by 3.5% or more.

Jitters over the economic reports and the Fed outweighed M&A news.

Medco Health

(MHS)

said it will acquire

PolyMedica

(PLMD)

for $1.5 billion, a 17% premium to the stock's last closing price. Medco shed 1.2% to $85.11, while PolyMedica jumped 14.1% to close at $51.69.

Wendy's

(WEN) - Get Report

traded higher after word that

Triarc

(TRY)

, which owns the Arby's restaurant name, and Nelson Peltz's Trian Fund may purchase the restaurant chain. Wendy's gained 70 cents, or 2.2%, to $32.69.

Home Depot

(HD) - Get Report

confirmed that it will take less than it had planned for its supply unit, saying it will sell 87.5% of the division to private equity investors for $8.5 billion. Home Depot will retain a 12.5% stake. Previously, the sale was priced above $10 billion. Shares added 3 cents, or 0.1%, to close at $35.05.

Away from stocks, the front-month October crude contract ended lower by 19 cents to $71.74 a barrel. Gasoline prices were lower by 2 cents at $2.02 a gallon.

Treasury bonds went higher. The 10-year note rose 11/32 in price, yielding 4.53%. The 30-year bond was up 1/32 in price to yield 4.85%.

Asia's markets finished lower overnight. Hong Kong's Hang Seng eased nearly 1%, and Japan's Nikkei 225 dipped 0.1%. In Europe, London's FTSE 100 was off 1.9%, and Germany's Xetra Dax was down 0.7%.