The decline in the S&P 500 left the index in negative territory for the year. Many investments such as mutual funds either track or are measured against the S&P.

The worries over the economy sent investors rushing to the safety of government securities. The yield on the Treasury's 10-year note for a time fell below 4 percent for the first time since 2005. The shift into bonds came as the Dow briefly sank below the lows seen in the market's August pullback.

The stock market has been thrashing about recently as investors attempt to gauge how companies will fare amid a further slowdown in the U.S. housing market, deterioration of credit and record oil prices that crested above $99 a barrel in electronic trading ahead of Wednesday's session. Stocks, which have fallen in seven of the previous nine sessions, haven't enjoyed the boost seen in recent years during Thanksgiving week, which is capped by the retail bonanza Black Friday.

Economic readings did little to instill confidence among investors. The Mortgage Bankers Association said mortgage application volume fell 3.6 percent last week. Meanwhile, the slump in housing suggested banks will continue to face souring mortgage debt.

Government-sponsored lender Freddie Mac, which reported a $2 billion quarterly loss Tuesday and saw shares plummet nearly 29 percent, declined again Wednesday after an analyst downgrade. Countrywide Financial Corp., the nation's largest mortgage lender, lost further ground.

In other economic news, the Conference Board suggested an economic slowdown could accelerate in the coming months amid rising costs and further weakness in the housing market. Also, the Reuters/University of Michigan consumer sentiment survey showed its lowest reading in two years — an unwelcome development for retailers entering what are for many the most important months of the year.

The Commerce Department said jobless claims fell by 11,000 last week, a positive sign for U.S. employment, but the report didn't appear to alleviate anxiety about the potential for weaker consumer spending.

"People are buying and selling off the headlines. The market is so emotional," said Neil Hennessy, president and portfolio manager of Hennessy Funds. "You look at oil approaching $100. People are taking their money and going to the sidelines."

According to preliminary calculations, the Dow fell 211.10, or 1.62 percent, to 12,799.94. The financial companies that are part of the 30-stock index hit fresh 52-week lows Wednesday and the blue chip index is now down 9.85 percent from its mid-October trading high. A 10 percent decline would meet the technical definition of a correction.

Broader stock indicators also fell. The S&P 500 index dropped 22.93, or 1.59 percent, to 1,416.77.

Meanwhile, the Nasdaq composite index tumbled 34.66, or 1.33 percent, to 2,562.15.

Investors turned to government bonds amid the uncertainty. The yield on the 10-year Treasury note, which moves inversely to its price, fell to 4.01 percent from 4.09 percent late Tuesday.

The dollar was mixed against most other major currencies, while gold advanced.

And with oil prices briefly reaching a high of $99.29 a barrel in overnight electronic trading, the question among investors is no longer if oil will reach $100 a barrel, but when — and how long it will stay there. Crude futures fell 74 cents to settle at $97.29 per barrel on the New York Mercantile Exchange after an Energy Department report showed supplie at a closely watched oil terminal in the Midwest rose for the first time in weeks.

"The high price of oil has hurt retail, entertainment, restaurants and clothing," said Don Hodges, chairman of Hodges Capital Management in Dallas. He attributes the market's recent retrenchment to concerns about energy, the consumer, housing and banking among other factors and notes that previous sharp drops in the market have occurred when investors have faced a similar confluence of worries.

An examination of the economic news offered little to boost investor sentiment. The Conference Board said its index of leading indicators fell by 0.5 percent in October to a two-year low, after ticking up by 0.1 percent in September and falling by 0.9 percent in August. And the Reuters/University of Michigan survey's final reading for November found consumer sentiment fell to 76.1 from 80.9 in October.

Wednesday's pullback ahead of the Thanksgiving holiday came after stocks finished with a gain Tuesday following a somewhat baffling pair of reports from the Federal Reserve. The Fed's minutes from its last meeting called its last rate reduction a "close call," but the central bank's economic forecast seemed to imply it is willing to keep lowering rates.

Wall Street is fairly confident the Fed will lower rates at its Dec. 11 meeting to keep the tight credit markets liquid, but it is uncertain about the health of the economy — particularly given big losses at Freddie Mac and its counterpart Fannie Mae, and possible liquidity problems at Countrywide.

Citigroup Inc., which has already announced write-downs of bad debt tied to mortgages, fell 67 cents, or 2.1 percent, to $30.73. The stock hit a fresh 52-week low of $30.50; its earlier low was $30.80. Meanwhile, JPMorgan Chase & Co. fell 95 cents, or 2.3 percent, to $40.68. It hit a low of $40.15, falling below an earlier 52-week low of $40.28.

Amid worries that both the private and government lending industries are struggling with the mortgage market implosion, Freddie shares fell 74 cents, or 2.8 percent, to $26. However, Fannie Mae, which had been down in the session, finished up 98 cents, or 3.5 percent, to $29.23; and Countrywide fell 86 cents, or 8.4 percent, to $9.42.

Declining issues outnumbered advancers by 3 to 1 on the New York Stock Exchange, where volume came to 1.61 billion shares compared with 1.87 billion traded Tuesday.

The Russell 2000 index of smaller companies fell 9.03, or 1.21 percent, to 740.30.