Investors had been expecting policymakers would cut rates for a third straight time, though there was debate over the size of the cut. Most economists had been expecting a quarter-point cut in the benchmark federal funds rate to 4.25 percent — but some investors were hoping for a half-point cut in the Fed's last meeting this year, and their disappointment took the market lower.

The Fed as expected also cut the discount rate, the rate it charges to lend directly to banks, by a quarter-point to 4.75 percent.

Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen. Investors had sent stocks higher in recent weeks as they grew more confident in the Fed's openness to loosening its policy again.

The Fed's accompanying statement also displeased investors, saying "information suggests that economic growth is slowing," but standing firm on a quarter-point cut for now.

Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen. Despite hints at the chance of further cuts, investors were left unimpressed. Stocks had climbed in recent weeks in part amid expectations that the Fed might be willing to make broad, perhaps paternalistic gestures at its December meeting to help assuage the market's fears.

The statement accompany the Fed's decision said "information suggests that economic growth is slowing," and removed language from prior statements stating that risks to the economy are balanced. But the Fed seemed to stand firm on a quarter-point cut for now.

"Expectations may have been for a more meaningful move based on the swirl in the financial markets. But the Fed is acknowledging that maybe things on Main Street aren't as bad as they are on Wall Street," said Bill Knapp, economist and chief investment strategist for MainStay Investments, a division of New York Life Investment Management.

In the final minutes before the closing bell, the Dow skidded 295.32, or 2.15 percent, to 13,431.71 after dropping 313.12 in the last half-hour of the session.

Broader indexes also fell. The Standard & Poor's 500 index fell 38.39, or 2.53 percent, to 1,477.57, and the Nasdaq composite index fell 67.04, or 2.47 percent, to 2,651.91.