Stocks fell by the most since late October on concerns that tighter lending rules in China could endanger an economic recovery. Disappointing earnings from IBM and Morgan Stanley added to investors' angst.
At the same time, a spike in the dollar pushed commodity prices sharply lower, hurting stocks of energy companies and materials producers.
The Dow Jones industrial average fell 120-plus points from a 15-month high. Earlier, the index lost more than 200 in its worst drop since Oct. 30. Demand for safe havens like government debt rose, pushing yields lower in the Treasury market.
Concerns grew that China's efforts to keep its economy under control could hurt a global recovery. A top banking regulator said Wednesday that China will increase monitoring of banks as it tries to prevent speculative bubbles in areas like real estate. Last week China took steps to restrict runaway lending as a way to cool that country's rapid growth.
Investors are worried that a slowdown in China's huge economy would spill over to other countries.
Beyond concerns about China, investors are also questioning whether a 68 percent gain in the benchmark Standard & Poor's 500 index in the past 10 months has been too much. Those doubts are intensifying as more companies report results from the final three months of 2009 this week. The early read is that cost-cutting has again helped boost profits, but revenues remain disappointingly weak.
IBM Corp. led the Dow industrials lower. The company reported late Tuesday that its earnings rose 9 percent from a year earlier, while sales rose less than 1 percent. The company's forecast was seen as cautious.
"We might see profitability out of companies this season but we're not really seeing revenue growth," said Dan Cook, senior market analyst at IG Markets in Chicago.
Banks posted mixed results. Bank of America Corp. reported better results and said credit conditions were improving, but also said the economic environment is "fragile." Wells Fargo & Co. sounded an optimistic note on consumer resilience, but Morgan Stanley fell short of expectations.
According to preliminary calculations, the Dow fell 122.28, or 1.14 percent, to 10,603.15, a day after rising 116 points. The Dow had been down as much as 208 earlier.
The broader S&P 500 index fell 12.19, or 1.06 percent, to 1,138.04, and the Nasdaq composite index fell 29.15, or 1.26 percent, to 2,291.25.
Bond prices rose, driving their yields lower. The yield on the benchmark 10-year Treasury note fell to 3.66 percent from 3.70 percent late Tuesday.
The dollar rose, reaching a five-month high against the euro as concern grew about heavy debt loads in Greece. Investors seeking safety bought up the dollar.
Gold fell. The gain in the dollar pushed commodity prices lower because a stronger greenback makes them more expensive for foreign buyers.
Crude oil fell $1.40 to $77.62 per barrel on the New York Mercantile Exchange.
Traders have been hoping to see greater reassurances from companies that the economy is strengthening. So far the earnings results have been mixed.
"We're going to be in the dance of one step forward and one step back as people digest all these earnings reports," said Frank Ingarra, co-portfolio manager at Hennessy Funds.
IBM fell $4.35, or 3.2 percent, to $129.79 after its report.
Bank of America said it lost $5.2 billion in the fourth quarter, mostly from costs related to repaying $45 billion in government bailout money. The stock rose 5 cents to $16.37.
Despite improving bottom lines at Bank of America and Wells Fargo, many investors remain pessimistic about bank shares. Over the past few days two major banks, JPMorgan Chase & Co. and Citigroup Inc., both said they're still cautious about the economy and aren't sure when loan losses will start to shrink.
Wells Fargo fell 35 cents to $27.93, while Morgan Stanley fell 43 cents to $30.73.
Brinker International, the owner of Chili's Grill & Bar, jumped $2.13, or 13.9 percent, to $17.44 after its results for the latest quarter topped expectations.
Stocks have yo-yoed since last week as investors try to asses the overall direction of the market. The Dow fell 101 Friday following an increase in bad loans at JPMorgan Chase & Co. Then, after a long holiday weekend, the index jumped 116 points Tuesday led by a gain in health care stocks.
Cook said the questions about the stability of the market are likely to increase as Feb. 1 approaches. That is when the Federal Reserve plans to halt most of the emergency lending programs it set up to help revive the economy. Traders looking to deploy some of the low-cost money circulating through the financial system have helped drive the surge since March.
"Once that cheap cash goes away, what's left?" Cook said. He predicts a "sizable correction" to let the economy catch up with the market.
Overseas, Britain's FTSE 100 fell 1.7 percent, Germany's DAX index dropped 2.1 percent, and France's CAC-40 fell 2 percent. China's main Shanghai composite index dropped 2.9 percent, while Japan's Nikkei stock average fell 0.3 percent.