The stock market found little to assuage its concerns in minutes from the Fed's last meeting, released during afternoon trading. The major indexes' losses steepened after investors parsed the minutes for signs of a possible cut in interest rates.

There had been some hope on the Street that Fed policymakers might have sent a stronger signal that they were more willing to cut interest rates to help calm turbulent market conditions. But in the minutes from the Federal Open Market Committee's Aug. 7 meeting, while the central bank noted the turmoil in the markets and said, "to the extent such a development could have an adverse effect on growth prospects, might require a policy response," it didn't discuss a cut in the benchmark federal funds rate that Wall Street has wanted.

The meeting predated a number of actions taken by the central bank to try to alleviate market volatility, including the Aug. 17 lowering of the discount rate, the interest the Fed charges banks to borrow money. Wall Street, despite a calmer week after that step, seems to be growing more dissatisfied because the Fed has not yet lowered the funds rate — and with a return to the intense volatility seen earlier this month may be trying to force the Fed to act.

"Investors are getting whipped side-to-side because their expectations, which are changing almost on a daily basis, aren't being met," said Chris Johnson, chief investment strategist at Johnson Research Group. "We've gone from the roof is on fire to the Fed is riding in on a white horse, and what we're seeing now is a reality check."

Stocks were down the entire session on further worries about the economy. The Conference Board's report that consumer confidence sagged in August amid volatile financial markets and ongoing housing problems added to the downbeat mood on the Street. Keeping alive credit worries, a Standard & Poor's housing index showed that U.S. home prices in the second quarter posted the sharpest decline since 1987.

According to preliminary calculations, the Dow fell 280.28, or 2.10 percent, to 13,041.85, its biggest drop since Aug. 9.

Broader stock indicators were also lower. The Standard & Poor's 500 index was down 34.43, or 2.35 percent, at 1,432.36, and the Nasdaq composite index shed 60.61, or 2.37 percent, to 2,500.64.

On Monday, the stock market pulled back from last week's strong gains after a report said sales of existing homes slipped in July for a fifth straight month to their slowest pace in nearly five years.

Fixed-income investors were encouraged by the consumer confidence report, which could indicate the Fed will be more likely to lower rates at its September meeting. Bond prices rose, with the yield on the benchmark 10-year Treasury note falling to 4.52 percent from 4.57 percent on Monday.

The dollar was lower against other major currencies, while gold prices were slightly lower.

Light, sweet crude fell 24 cents to $71.73 a barrel on the New York Mercantile Exchange. Oil prices fell last week on credit worries and as Hurricane Dean missed oil facilities in the Gulf of Mexico. They have rebounded in recent days, though, due to refinery problems and strong gasoline demand.

Analysts said there just wasn't much to encourage investors in a day with many traders on vacation and little in the way of corporate news. And, the lack of rate-cut support from the Fed minutes didn't change that.

"This is backward looking right now, the main thing you have to take out of this is the Fed continues to be worried about inflation and economic growth," said Ryan Larson, senior trader with Voyageur Asset Management. "They have already assured they stand ready to do something. But, the market was looking for more of a nod or a mention toward the credit problems — and I don't think they got it."

Investors might also be positioning themselves ahead of a speech by Federal Reserve Chairman Ben Bernanke on Friday. He will be speaking at the Kansas City Fed's economic symposium in Jackson Hole, Wyo.

Financial services stocks were among the worst hit during the session as investors reacted to not only economic reports that could affect the group, but a downgrade of several major players. Merrill Lynch analyst Guy Moszkowski cut ratings on Citigroup Inc., Lehman Brothers Holdings Inc., and Bear Stearns Cos. due to concerns about earnings.

Lehman Brothers Holdings Inc., the fourth-largest investment house, fell $3.47, or 6 percent, to $54.28. Bear Stearns, the fifth-largest investment bank, fell $3.78, or 3.4 percent, to $108.42. Citigroup Inc. fell $1.65, or 3.5 percent, to $46.14.

Meanwhile, the S&P housing report pushed shares of homebuilders lower. When home prices fall, owners have a hard time refinancing, which can lead to more defaults and delinquencies.

Hovnanian Enterprises Inc. fell 80 cents, or 7.1 percent, to $10.46. Luxury homebuilder Toll Brothers Inc. dropped 94 cents, or 4.3 percent, to $21.06. D.R. Horton Inc. declined 46 cents, or 3 percent, to $14.75.

Pharmacy benefits management company Medco Health Solutions Inc. said it will pay $1.5 billion in cash for diabetes treatment supplier PolyMedica Corp. Shares of Medco fell $1 to $85.11, while PolyMedica surged $6.40, or 14 percent, to $51.69.

The Russell 2000 index of smaller companies was down 21.6, or 2.74 percent, at 767.83.

Declining issues beat out advancers by a 3 to 1 basis on the New York Stock Exchange, where volume came to a light 1.15 billion shares.