A stronger dollar and disappointing corporate news muscled stocks lower Thursday over concerns that the economy will struggle to recover.
Major stock indexes slid more than 1 percent, including the Dow Jones industrial average, which fell 133 points for its third straight loss. Treasury prices jumped.
The dollar climbed to a three-month high against the euro, a sign investors were seeking safety. Investor confidence was further sapped as Citigroup Inc. sold stock at a steep discount as part of a plan to repay government loans and a forecast from FedEx Corp. fell short of expectations.
More downbeat news came in on the economy as the government reported an unexpected rise in unemployment claims. The number of new jobless claims rose to 480,000 last week, up 7,000 from the previous week.
Stocks could get a boost Friday from BlackBerry maker Research In Motion Ltd. and software company Oracle Corp., which each posted quarterly profits after the closing bell Thursday that topped expectations.
The slide Thursday came as the dollar rose, which cuts into profits of U.S. companies that do business abroad. The euro slumped after Standard & Poor's lowered its debt rating on Greece, the latest European country to have credit problems.
A pair of improved economic reports did little to shore up the market. The Conference Board's index of leading economic indicators rose in November for the eighth consecutive month, while the Philadelphia Federal Reserve said manufacturing in its region rose.
Investors have been looking for signs that a nine-month advance in the stock market is justified by improvements in the economy. At the same time, as year-end approaches many investors are also eager to secure gains for 2009.
John Merrill, chief investment officer of Tanglewood Wealth Management, said the rising dollar was overshadowing the improvement in the economic numbers. He said the dollar was benefiting as traders concerned about rising debt levels in countries like Greece pulled out of the euro.
"There are a lot of shifting sands as people, not just federal reserve banks, look at the underpinnings of those currencies," he said.
The Dow fell 132.86, or 1.3 percent, to 10,308.26. The broader Standard & Poor's 500 index fell 13.10, or 1.2 percent, to 1,096.08, and the Nasdaq composite index fell 26.89, or 1.2 percent, to 2,180.05.
Bond prices jumped, pushing yields lower. The yield on the benchmark 10-year Treasury note fell to 3.48 percent from 3.60 percent late Wednesday.
The ICE Futures U.S. dollar index, which measures the greenback against a basket of foreign currencies, rose 1 percent.
Gold fell, while crude oil dropped 1 cent to settle at $72.65 per barrel on the New York Mercantile Exchange.
In corporate news, Citigroup fell 25 cents, or 7.3 percent, to $3.20 after the Treasury Department backed out of its plans to sell its 34 percent stake in the company.
The move came after a stock sale drew a tepid response from investors. The bank is trying to repay $20 billion of the $45 billion in government support it received to weather the financial crisis. The company said it would sell 5.4 billion shares at $3.15 apiece. That was 9 percent below where shares stood when the company announced the plan.
Meanwhile, FedEx provided a cautious forecast for the quarter that ends in February after reporting its fiscal second-quarter earnings fell 30 percent. Investors track the company's business because it is seen as a signal about the overall strength of the economy. The shipping company fell $5.48, or 6.1 percent, to $84.47.
The concerns about debt in Europe and the corporate news brought reminders that the economy isn't likely to spring back to life the way it did after downturns earlier in the decade.
"The recovery is likely to be muted," said Jim Baird, partner and chief investment strategist at Plante Moran Financial Advisors. "It's likely to be held back by a consumer that remains in a more delicate spot than would ideally be the case coming out of a recession."
Baird added that the market's retreat wasn't worrisome because of the run stocks have been on since March. The benchmark S&P 500 index is up 21.3 percent for the year so some selling is to be expected as investors look to lock in profits for the year.
About three stocks fell for every one that rose on the New York Stock Exchange, where heavy trading in Citigroup helped push consolidated volume to 7.9 billion shares compared with 4.9 billion Wednesday.
The Russell 2000 index of smaller companies fell 6.96, or 1.1 percent, to 604.25.
Britain's FTSE 100 fell 1.9 percent, Germany's DAX index lost 1 percent, and France's CAC-40 fell 1.2 percent. Japan's Nikkei stock average fell 0.9 percent.