Low-risk debt moved into a high-risk neighborhood Tuesday, taking major averages along for the descent.

Financial institutions and money market funds that are exposed to so-called low risk, short-term debt that's collateralized by mortgage-backed securities may be in jeopardy.

So far, the problems with short-term debt, called asset-backed commercial paper, are reportedly limited to Sentinel Management Group, an Illinois-based money management firm, and Coventree, a Canadian company that organizes commercial paper sales for companies seeking the short-term financing.

But the potential for contagion has increased amid fears that short-term financing obstacles could lead to further drying up of liquidity across the board.

"This really turns it up a notch in terms of systemic risk," says Christian Stracke, analyst at CreditSights, an independent fixed-income research firm.

In reaction, the Dow Jones Industrial Average fell 208 points, or 1.6% to close at 13,028.92 while the S&P 500 fell 1.8% to close at 1426.56 and the Nasdaq Composite declined 1.7% to close at 2499.12. (Risk of additional declines Wednesday accelerated after the close as Applied Materials ( AMAT) issued cautious comments about its fiscal fourth quarter.)

The CBOE Volatility index, or VIX, which is an indicator of fear, ended near its highs for the day, up 4.7% at 27.83. The Amex Securities Broker Dealer Index slid 3.1% amid more losses for big brokers, including Lehman Brothers ( LEH)and Goldman Sachs ( GS).

The stock and credit markets have been extremely volatile since the subprime mortgage market sparked a correction in riskier debt assets. Mystery surrounding the valuation of derivatives called collateralized debt obligations has also led to liquidity drying up, a scenario so real that it recently required extra liquidity injections from central banks around the world.

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