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Stocks end near lows; Dow skids 200 points

Stocks finished near their session lows Thursday, with the Dow dropping more than 200 points, as the market continued to speculate about when the Federal Reserve, responding to an improved economy, will start to reduce its generous stimulus to the markets.

(Read more: S&P could trade at 1,900 'relatively easily': Pro)

The major indexes posted their biggest two-day losses since June. Meanwhile, the 10-year Treasury yield jumped to 2.82 percent, its highest level in two years, before pulling back to 2.75 percent.

"A lot of uncertainty creates volatility," said Todd Salamone, director of research at Schaeffer's Investment Research. "We had some bellwether names with disappointing earnings, and economic data that sparked tapering worries. We also broke below a support level on the S&P 500 at 1,685, which is the level where we entered August and the peak back in May."

The Dow Jones Industrial Average tumbled 200 points, dragged down by a 7 percent drop in Cisco. The blue-chip index fell through its 50-day moving average and is on track for its biggest weekly drop in nearly four months.

The S&P 500 and the Nasdaq also fell more than 1 percent each. 

All key S&P sectors were firmly in negative territory, led by techs and financials.

(Read moreCramer: 'Giant reset' looming for markets)

"The S&P's tight range of the last 13 trading days bounded by 1,709 to 1,682 has been clearly broken," wrote Elliot Spar, market strategist at Stifel Nicolaus. "The decline of the last few days is the averages catching up on the downside to the correction that many leading sectors and stocks have been going through for the last two months. I expect the 1,650 area on the S&P to stem this decline."

On the economic front, manufacturing growth in New York and mid-Atlantic region weakened in August, according to the New York Federal Reserve and the Philadelphia Federal Reserve. And industrial production was unchanged in July as a decline in manufacturing output and utilities counteracted an uptick in mining activity, according to the Federal Reserve.

Consumer prices edged up 0.2 percent in July, matching expectations, according to the Labor Department.

On the upside, weekly jobless claims fell 15,000 to a seasonally adjusted 320,000, hitting the lowest level in nearly six years, according to the Labor Department. Economists polled by Reuters had expected a reading of 335,000. 

(Read more: The really bad newsbehind the jobless claims drop )

And homebuilder confidence rose near an eight-year high in August, according to the National Association of Home Builders. Homebuilders including Lennar and DRHorton turned higher following the report.

Earlier, St. Louis Fed President James Bullard reiterated his comments from Wednesday that the central bank should wait for further evidence that the economy is firming before winding down its asset-purchase program. 

"The committee still needs to see more data on macroeconomic performance from the second half of 2013 before making a judgement in this matter," Bullard said at an event hosted by the St. Louis Fed.

(Read more: Worst case for Fed taper: mere market 'indigestion'?)

Among earnings, Wal-Mart Stores declined after the world's largest retailer reported disappointing quarterly sales and cut its outlook for the year.

Kohl's climbed even after the department store chain forecast current-quarter earnings below expectations after reporting a decline in second-quarter profit.

Cisco Systems posted earnings and revenue that edged above Wall Street expectations but shares tumbled heavily after the network equipment maker said it would cut 4,000 jobs in the face of uncertain demand for its products. Analysts were mixed on the stock: at least three brokerages cut their price targets for the company, while two firms lifted their targets.

DellApplied Materials and Nordstrom are among notable companies slated to post earnings after the closing bell.

Billionaire investor Warren Buffet's Berkshire Hathaway sharply reduced its holdings of Kraft Foods and Mondelez during the second quarter, according to Berkshire's quarterly filing with the SEC. Kraft Foods and Mondelez were created by a split up for Kraft Foods last October.

Meanwhile, Berkshire raised its stake in automaker General Motors to 40 million shares and reported a new stake in satellite television provider Dish Network of nearly 550,000 shares, worth approximately $24 million.

Apple was stuck below $500 after breaking above that level on Wednesday for the first time since January. RBC raised its target price on the iPhone maker to $525 from $475. 

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