NEW YORK (Reuters) -Stocks fell on Thursday, with the benchmark S&P 500 plummeting to a 15-month low, as news of a plunge in regional factory activity and a hefty loss at Merrill Lynch further clouded an increasingly dire view of the economy.
Federal Reserve Chairman Ben Bernanke echoed the bleak assessment of the economy in comments to lawmakers, reiterating that the Fed was ready to act aggressively and throwing his support behind other efforts to counter the risk of recession.
In one of the strongest signals yet that the economy is at high risk of contracting, the Philadelphia Federal Reserve Bank said mid-Atlantic factory activity has slowed much more than expected to levels that typically signal recession.
That extinguished Wall Street's early attempt at a rally, with shares of companies most sensitive to the economy's ups and downs suffering the most. Small-cap stocks fell into bear market territory, while at the opposite extreme, megacap General Electric (GE.N) dropped almost 4 percent ahead of its profit report early Friday.
Financials were battered after Merrill Lynch & Co Inc (MER.N) reported about $16 billion in mortgage-related write-downs and adjustments in the worst quarter in the company's history. Merrill shares dropped 10.2 percent to $49.45, while the S&P financial index (.GSPF) fell to its lowest in four-and-a-half years.
"Fear and pessimism is really beginning to dominate Wall Street," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.
"More data showed weakness in the economy, and Merrill Lynch took a write-down the size of which, until recently, would have seemed unfathomable."
The Dow Jones industrial average (.DJI) fell 306.95 points, or 2.46 percent, to close at 12,159.21, down more than 1,000 points since the beginning of 2008.
The Standard & Poor's 500 Index (.SPX) was down 39.95 points, or 2.91 percent, at 1,333.25. The Nasdaq Composite Index (.IXIC) was down 47.69 points, or 1.99 percent, at 2,346.90.
The biggest bloodletting came among bond insurers, with
Ambac Financial Group Inc's (ABK.N) shares plunging 51.9 percent to $6.24 after Moody's Investors Service said it may cut the company's debt ratings, raising fresh questions about its ability to stay in business. Rival MBIA's (MBI.N) shares fell 31.2 percent to $9.22.
The Russell 2000 index (.RUT) dropped to a level indicating that small-cap stocks have crossed the threshold of what is considered a bear market. The index was down 20.5 percent from its record close in mid-July.
Not even indications from the Fed's Bernanke that the central bank was ready to deliver big interest-rate cuts could staunch the bleeding.
"Everyone is waiting for the Fed to solve the problem, so when Bernanke starts pointing out that it needs more than the Fed, that really highlights how difficult things are," Kuby said.
Investors were also hit with more bad news on housing as a government report showed that groundbreaking on new homes last month slumped to the slowest pace since 1991, while building permits sank to their lowest since 1993.
Fears that a U.S. recession may lie ahead have roiled global stock markets in recent weeks. A Reuters poll of 250 economists from the Group of Seven major developed economies on Thursday said the United States now faces a 45 percent chance of recession.
Energy shares fell, with Exxon Mobil (XOM.N) down 3 percent at $83.91 as the price of oil slipped 0.9 percent.
Pharmaceutical shares also ranked among the S&P 500's top decliners. Merck & Co Inc (MRK.N) and Schering-Plough Corp (SGP.N) were hurt by problems in a clinical trial of their shared cholesterol-fighting drug, Vytorin. Merck ended down almost 6 percent at $54.87 on the NYSE and was the second-heaviest weight on the blue-chip Dow average. Schering fell 8 percent to $21.62.
Adobe Systems (ADBE.O) fell 5.7 percent to $35.55 on the Nasdaq, after Adobe's stock was downgraded by UBS.
General Electric shares fell $1.35, or nearly 4 percent, to $33.21 on the NYSE.
United Technologies (UTX.N) fell 4.2 percent to $68.09 and 3M (MMM.N) dropped 3 percent to $74.96.
Trading was heavy on the NYSE, with about 2.17 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion, while on the Nasdaq, about 2.79 billion shares traded, ahead of last year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by a ratio of more than 5 to 1 on the NYSE and by about 3 to 1 on Nasdaq.
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