NEW YORK (TheStreet) -- The major U.S. stock indices saw a selloff accelerate into the market close after Germany reportedly rejected parts of a European Union draft of solutions for the Continent's debt crisis.

The Dow Jones Industrial Average dropped 199 points, or 1.6%, to finish at 11,998. The S&P 500 was down 27 points, or 2.1%, at 1234, and the Nasdaq was off 53 points, or 2%, at 2596.

The draft, obtained by Reuters, proposed introducing the region's permanent European Stability Mechanism in July 2012, a year earlier than proposed; giving the facility a banking license; and having it run alongside the existing European Financial Stability Facility fund, which was supposed to be have been temporary.

The draft said the ESM would have a capacity of 500 billion euros, according to Reuters.

Germany rejected the proposal to give the European Stability Mechanism a banking license and issuing common eurozone debt, Reuters reported, citing a senior German source.

The European Banking Authority said today that European banks must raise $154 billion in new capital by June 2012. Spain and Italy are the most capital-deficient and need to raise more than 26 billion and 15 billion euros, respectively. The largest banks in Germany face a 13 billion-euro shortfall, all the more reason for the ECB to try to restore confidence in the banking industry.

Comments from European Central Bank President Mario Draghi had sent stock futures falling early Thursday. Draghi announced that the ECB would ease collateral requirements and provide banks with three-year loans for the first time, starting later this month. However, he hinted that the bank would not embark on quantitative easing, saying that "we have a treaty that bans monetary financing." He also dampened hopes that the bank would undertake aggressive bond buying to suppress soaring sovereign bond yields in the eurozone.

"Draghi essentially said his hands are tied," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "I think he's holding back until the broader meeting between eurozone leaders this week. He's really putting the pressure on politicians to figure it out."

Investors are now watching what may come out of the summit in Brussels that kicks off today and extends into Friday. Meanwhile, rumors about potential plans for Europe's rescue fund and how politicians will bring about tighter unity among euro nations continue to swirl.

"If a news service can get comments from some unnamed sources in Europe, it's bound to screw up markets in the final hour of trading," added Pado. "It's really come down to that. The market is so knee-jerking that the comments don't even have to be from an official. They can be from a subordinate."

In recent days, stocks have moved on rumors that G20 countries might lend money to Europe via the International Monetary Fund. There were also reports that a second bailout fund for the eurozone could be created. Investors are hoping that the upcoming summit may lead to further clarification on these reports.

The situation in Europe overshadowed some positive news. Weekly jobless claims in the U.S. dropped 23,000 to 381,000 last week from a revised 404,000, marking the lowest level since late February. Economists had expected claims to come in at 395,000 after an originally reported 396,250. Before the jobs data, the European Central Bank cut its main interest rate by 0.25% to 1% although the move was expected by economists.

Germany's DAX fell 2%, while London's FTSE lost 1.1%. Overnight, Asian stocks dropped as economic data from Japan and Australia pointed to a slowing global economy. Japan's Nikkei Average settled 0.66% lower, and Hong Kong's Hang Seng Index closed down 0.69%.

In corporate news, Pacific Sunwear of California ( PSUN), the specialty retailer, unveiled a restructuring plan Wednesday that calls for the closure of up to 200 underperforming stores over the next 14 months. The company also said it has secured a five-year $60 million term loan from private-equity firm Golden Gate Capital, and that it has completed a five-year $100 million revolving credit line with Wells Fargo Capital Finance. Shares jumped 10.4% to $1.49.

"Breakout! Sometimes it hits you like that," says Jim Cramer, RealMoney columnist and manager of the charitable trust portfolio, Action Alerts PLUS. "You will be watching the ticker go by and you will say, 'Holy cow ...'"

THQ ( THQI ), the entertainment software maker, lowered its revenue outlook for the third quarter because of weak sales of its uDraw game tablet on the XBox 360 and Sony Playstation 3 gaming systems. Shares plummeted 38.3% to 90 cents.

McDonald's ( MCD) November sales rose more than expected, led by gains in Japan, China and Europe. Sales at restaurants open at least 13 months increased by 7.4% when analysts were looking for only a 4.6% rise. Shares of the food chain were up 0.5% to $96.92.

Costco ( COST), the warehouse retailer, earned $320 million, or 73 cents a share, in the fiscal first quarter, up from $312 million, or 71 cents, a year earlier. Net sales rose 13% to $21.18 billion from $18.82 billion. Analysts were expecting profit of a 80 cents a share on sales of $21.29 billion. Shares fell 2% to $85.76.

Unionized Boeing ( BA) machinists voted to approve a four-year contract extension. Boeing promised that if workers approved the pact, the company would build the new version of the 737 in the Puget Sound region, while the machinists said they would drop their allegations that Boeing opened a nonunion assembly plant in South Carolina in retaliation for a previous strike.

Separately, Bloomberg reported that FedEx ( FDX) plans to order about 30 Boeing wide-body freighters to replace older, less fuel-efficient jets. The planes would be valued at about $5.26 billion at list prices, the report said. Boeing shares were down 0.6% at $70.17.

Smithfield Foods ( SFD), the pork producer, reported second-quarter profit 76 cents a share on revenue of $3.3 billion, beating the average analyst earnings estimate of 71 cents a share on revenue of $3.2 billion. Shares were down 3.7% at $24.01.

February gold futures lost $31.40 to close at $1,713.40 an ounce after the European Central Bank failed to ramp up bond buying. The euro and gold have been moving together of late in opposition to the U.S. dollar. In other commodities, January oil futures fell $2.15 to settle at $98.34 a barrel.

The benchmark 10-year Treasury advanced 18/32, diluting the yield to 1.976%, and the U.S. dollar rose 0.5% against a basket of currencies. The euro lost 0.5% against the dollar.

-- Written by Andrea Tse and Chao Deng in New York.