Updated from 4:11 p.m. EST

Stocks were hammered late Tuesday as troublesome comments from telecom giant AT&T ( T) compounded early weakness brought on by worries in the financial sector and disappointing housing data.

The Dow Jones Industrial Average see-sawed for most of the session, but plunged in the final hour on news of negative remarks from AT&T's CEO at an investor conference. The index sank 238.42 points, or 1.86%, to 12,589.07.

The S&P 500 dropped 25.99 points, or 1.84%, to 1390.19. The Nasdaq Composite plummeted 58.95 points, or 2.36%, to 2440.51, giving the tech-heavy index its eighth straight losing session.

The late decline came after a Bloomberg report that AT&T CEO Randall Stephenson said the company faces softness in its consumer business. Shares of the phone giant tumbled 4.9%. Rival Verizon ( VZ) slumped 2.7%, and Sprint Nextel ( S) fell 3.3% in sympathy.

"The market was in a fragile position and cracked under all the bad news," said Phillip Roth, chief technical market analyst with Miller Tabak. "It is a bear market, and it's more likely to react to negative news than positive news. Even though we're approaching oversold conditions, there are no indications that the selling is over."

Marc Pado, U.S. market strategist with Cantor Fitzgerald, said that traders will now have to hope for another Federal Reserve rate cut before the market will move higher.

"There is no base here, so it will take some time before mounting anything more than a technical bounce, and hopefully soon," said Pado.

Volume was strong while breadth was weak. On the New York Stock Exchange 4.65 billion shares changed hands. Volume on the Nasdaq reached 2.57 billion shares. Losers beat winners 2 to 1.

Earlier, rumors that Countrywide Financial ( CFC) would file for bankruptcy protection sent the major averages reeling. The speculation drove the lender's stock sharply lower and slammed financial stocks.

Countrywide said there was no truth to the speculation. Still, shares plunged $2.16, or 28.3%, to end at $5.48.

"This is a market that is ripe for rumors, given the type of discomfort that is out there," said Paul Mendelsohn, chief investment strategist with Windham Financial. "Technically, we're breaking through a five-year uptrend line and we're taking out lows from November. People are looking for an excuse to sell and get out."

Among other financial names, Bear Stearns ( BSC) dropped 6.7% to $71.17. Earlier, shares rose on word that CEO Jimmy Cayne will resign from the position. The change comes after criticism over Cayne's reaction to the credit crisis that has knocked the stock 53% lower over the past year.

The Amex Securities Broker/Dealer Index fell 4.7%, as component E*Trade Financial ( ETFC) tumbled 20.5% on fears of capital strains. Morgan Stanley ( MS), Merrill Lynch ( MER), Goldman Sachs ( GS) and Lehman Brothers ( LEH) also finished with losses.

Housing stocks were also among the worst decliners after a National Association of Realtors report on pending-homes sales for November showed a decline of 2.6%, more than three times the estimated drop.

Ian Shepherdson, chief economist with High Frequency Economics, said the "the underlying trend in sales remains downwards, because people are unwilling to borrow money in order to finance the purchase of rapidly depreciating assets."

KB Home ( KBH) piled on the bad news after the homebuilder posted a fourth-quarter loss that ballooned from a year ago due to the housing slump, forcing the company to write down unsold inventory. KB Home finished with a loss of $1.67, or 9%, at $16.81.

The Philadelphia Housing Sector Index tumbled 4%. The Amex Airline Index was also lower, dropping 8%, and the S&P Retail Index was off 1.9%.

Traders were also dealing with a speech from Philadelphia Fed Charles Plosser, who dented hopes for additional rate cuts. Plosser said that downside risks from even weaker economic growth may call for further adjustments to policy, but that inflation risks remain too high.

"We must remain vigilant on the inflation front and be prepared to act as necessary to avoid the risk of undermining public confidence in the central bank's commitment to price stability," said Plosser.

On the bright side, a 4.2% advance in the Amex Gold Bugs Index made it the best market subgroup. Gold Fields ( GFI) and Yamana Gold ( AUY) were up 6.2% and 7.5%, respectively, and were the top-performing component stocks.

Those moves came as gold futures hit an all-time high of $883.80 and finished up $18.30 to $880.30 an ounce.

Also in commodities, crude oil climbed $1.24 to end at $96.33 a barrel. During the previous session, crude plummeted nearly 3% just days after crossing the $100-a-barrel level.

Elsewhere, Starbucks ( SBUX) said late Monday that CEO Jim Donald has been replaced by founder and Chairman Howard Schultz. Shares of the coffee chain have tumbled 30% over the last six months amid increasing competition.

Following the announcement, Banc of America Securities upgraded Starbucks to neutral from sell, and shares surged $1.59, or 8.7%, to $19.97.

U.S. Treasury prices finished the day mixed. The 10-year note rose 4/32 in price, yielding 3.82%. The 30-year bond slid 2/32 in price, yielding 4.34%.

"Short-term market movements are typically driven by some combination of fear or greed," said Bill Stone, chief investment strategist with PNC Wealth Management, in a note. "We have again entered the fear stage as fear of the unknown has overwhelmed any of the positive valuation data."

Overseas markets were mixed. Overnight in Asia, Japan's Nikkei 225 tacked on 0.2%, while Hong Kong's Hang Seng was lower by 0.3%. In Europe bourses, London's FTSE 100 added 0.3%, and Germany's Xetra Dax was up 0.4%.