NEW YORK — Stocks have closed sharply lower as investors fretted over a rise in unemployment claims and the prospect of more small banks failing.

Federal Reserve Chairman Ben Bernanke said in testimony to Congress Thursday that while large U.S. banks will likely recover from the recent credit crisis, other banks are at risk of failing. Three small U.S. banks have already failed since the summer, when the lending industry started losing billions of dollars as mortgage defaults soared.

Meanwhile, the Labor Department reported that first-time unemployment claims rose last week by 19,000 to 373,000, the highest level since late January.

The Dow Jones industrial average has closed down about 112 points at the 12,581 level.