updated 2/6/2009 4:47:24 PM ET 2009-02-06T21:47:24

Wall Street remained weary Wednesday, disheartened by more signs of economic stress — including dismal reports from major retailers, a bleak outlook for the nation’s auto industry and additional job cuts in the already beaten-down financial sector. News that the government won’t buy banks’ soured mortgage assets as originally planned further discouraged investors.

The Dow Jones industrials fell more than 400 points, and all the major indexes dropped more than 4 percent as the market retreated for a third straight session.

Investors sent stocks lower on Monday and Tuesday on concerns that a severe pullback in consumer spending will exacerbate the weakened economy. Remarks from Treasury Secretary Henry Paulson on Wednesday, however, underscored the anxiety that remains about the health of the financial system. After being down in early trading, stocks plunged further following his speech.

Paulson said the government’s $700 billion financial rescue package won’t purchase troubled assets from banks after all. He said that plan would have taken too much time and the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending.

But he was noncommittal about direct support for the auto industry, saying it was a "critical industry" but that the bailout plan was not designed for them.

While the market had been pleased by the government’s decision weeks ago to buy banks’ stock, investors still hoped to see the financial industry relieved of the burden of the mortgage assets whose decline in value helped set off the nation’s financial crisis.

Meanwhile, retailers like Macy’s Inc. and Best Buy Co. showed signs of strain from a cash-strapped public, and Morgan Stanley outlined plans to slash more jobs. Concerns about the future of the top U.S. automakers, which analysts believe teeter on the brink of bankruptcy, also weighed on the market.

“The news is continuously negative,” said Peter Cardillo, chief market economist at Avalon Partners.

Analysts believe the market is in the process of retesting the intraday low hit on Oct. 10, when the blue chips dipped below the 8,000 mark.

“We’re just going through the typical process of testing and retesting,” said Matt King, chief investment officer of Bell Investment Advisors. “If we can continue to build higher and higher lows, that’s definitely a positive. If the Dow can build a base above 8,100 and bounce off that, we see that as a definite technical positive.”

Unofficial closing numbers showed the Dow shed 411.30, or 4.73 percent, to 8,282.66.

The broader Standard & Poor’s 500 index dropped 46.63, or 5.19 percent, to 852.32, and the Nasdaq composite index stumbled 81.69, or 5.17 percent, to 1,499.21.

Declining issues outnumbered advancers by about 9 to 1 on the New York Stock Exchange, where volume came to a light 656.80 million shares.

Though Paulson’s announcement marks a major shift in the original bailout plan and seemed to rattle investors, Wall Street analysts generally believe that the Treasury is now on the right path.

“That’s really what they should have done originally,” said King. “First and foremost, we have to make sure banks are going to survive and then we can worry about lending. This is the quickest and most efficient way to do that.”

“Buying bad assets doesn’t do that,” he said.

However, there is some concern that the bailout funds are being depleted rather quickly, said Jason O’Donnell, senior research analyst at Boenning & Scattergood.

“Investors are generally in favor of the emphasis on the capital purchase provisions,” O’Donnell said. But, “we’re down quickly to a small portion of total funds remaining for other purposes.”

Paulson also announced a new goal for the program to support financial markets that supply consumer credit in such areas as credit card debt, auto loans and student loans. He said, “with a stronger capital base, our banks will be more confident” to support economic activity.

Paulson said that non-financial firms as well as banks may need additional cash infusions but that he saw “implementation difficulties” aiding companies that were not federally regulated. He said 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of these loans.

“This market, which is vital for lending and growth, has for all practical purposes ground to a halt,” Paulson said.

Bleak news from some of the nation’s biggest retailers also sent stocks falling. Macy’s said it lost $44 million in the third quarter as sales at the department store retailer fell more than 7 percent. And consumer electronics retailer Best Buy slashed its fiscal 2009 guidance on fears that consumer spending will erode even further.

Investors are worried that a severe pullback in consumer spending — which drives more than two-thirds of the U.S. economy — will prolong a global economic downturn.

Macy’s shares dipped 59 cents, or 6.3 percent, to $8.82. Best Buy shares tumbled $1.71, 7.1 percent, to $22.17.

The future of the country’s top automakers remained a major concern on the Street as well. House Speaker Nancy Pelosi wants Congress to support a financial bailout for the troubled U.S. auto industry, which is suffering under the weight of poor sales, tight credit and a sputtering economy. And Democrats in Congress have begun drafting legislation that would give General Motors, Ford and Chrysler access to $25 billion of the rescue funds.

General Motors shares rose 25 cents, or 8.5 percent, to $3.17, while Ford gained 12 cents, or 6.6 percent, to $1.92.

In corporate news, Morgan Stanley outlined plans to cut 10 percent of staff in its institutional securities group — its biggest business that covers everything from investment banking to stock trading. The nation’s No. 2 securities firm, which converted into a bank holding company in September, plans to scale back this business before the end of the year. The layoffs are in addition to a 10 percent cut made earlier this year to the group.

Morgan Stanley also plans to restructure its money management business by cutting 9 percent of the group’s work force. The securities firm employs about 44,000 people worldwide. Morgan Stanley shares fell 98 cents, or 7 percent, to $13.10.

Meanwhile, American Express Co. is said to be seeking about $3.5 billion from the government to help boost its balance sheet, according to a report in The Wall Street Journal citing people familiar with the situation. AmEx, the No. 4 U.S. credit card issuer, won approval Monday from the Federal Reserve to become a bank holding company, which gives it the ability to grow a large deposit base and access financing from the Fed.

AmEx shares dropped $2, or 8.9 percent, to $20.40.

Government bond prices, which did not trade Tuesday because of Veterans Day, moved higher as investors looked for safer investments. The three-month Treasury bill’s yield fell to 0.14 percent from 0.22 percent late Monday, and the yield on the benchmark 10-year Treasury note fell to 3.67 percent from 3.76 percent late Monday.

Lower yields indicate stronger demand.

Crude dropped below $57 a barrel Wednesday on the growing realization that global economic growth next year will slow more than originally feared, cutting demand for crude products such as gasoline. Light, sweet crude fell $2.40 to $56.93 a barrel on the New York Mercantile Exchange.

The dollar was mixed against other major currencies, while gold prices dipped.

Overseas, Japan’s Nikkei closed down 1.29 percent and Hong Kong Hang Seng fell 0.73 percent. In European trading, London’s FTSE 100 fell 1.52 percent, Germany’s DAX fell 2.96 percent, and France’s CAC-40 dropped 3.07 percent.

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