Disappointing forecasts from retailers and concern about the government's financial overhaul package pounded stocks Thursday.
The Dow Jones industrial average lost 146 points after edging higher Wednesday. Broader indexes dropped for a fourth straight day.
Downbeat forecasts from retailers raised concerns that high unemployment and weak consumer spending would stall an economic rebound. Nike Inc. dropped 4 percent after saying increased costs could hurt earnings. Bed Bath & Beyond fell 5.6 percent after the home goods retailer's second-quarter earnings forecast missed expectations.
Dell Inc. lost 6.4 percent after the computer maker's fiscal year forecast failed to top expectations, as some analysts had hoped.
Meanwhile, financial stocks fell after Congress continued working on a bill to overhaul regulation of the industry. Democratic leaders hoped to reconcile the House and Senate bills so President Barack Obama can have a deal in place by the time he meets with the leaders of the Group of 20 nations this weekend in Toronto.
Traders were concerned that some provisions of the bill would cut into bank profits. Large banks were lobbying to strike a proposal that would make the industry cover costs to dismantle the mortgage giants Fannie Mae and Freddie Mac. Bank of America Corp. dropped 2.7 percent and JPMorgan Chase & Co. lost 2.2 percent.
Economic news didn't help. The government said initial claims for unemployment benefits fell last week but remained above the level that would signal employers are ramping up hiring. A second report indicated that orders for durable goods fell last month for the first time in six months. Orders for big-ticket goods fell 1.1 percent in May. Analysts predicted a 1.3 percent drop.
"There is just such a stagnation in the economy," said Dan Deming, a trader with Stutland Equities in Chicago. Deming said investors are struggling to determine whether the economy can continue to bounce back without as much help from government spending.
"The water is so murky right now," Deming said. "It's just very hard to get a picture of where we're at."
The Dow fell 145.64, or 1.4 percent, to 10,152.80. The Standard & Poor's 500 index fell 18.35, or 1.7 percent, to 1,073.69. It was the first four-day drop for the S&P 500 index since early May. The Nasdaq composite index fell 36.81, 1.6 percent, to 2,217.42.
Interest rates were mixed in the Treasury market. The yield on the benchmark 10-year Treasury note rose to 3.14 percent from 3.12 percent late Wednesday. The yield had fallen to a 13-month low of 3.07 percent.
The recent drop in rates is good news for borrowers. Freddie Mac said Thursday that the cost of a home loan has fallen this week to the lowest level on record. The average rate on a 30-year fixed mortgage dropped to 4.69 percent from 4.75 percent last week.
Crude oil rose 16 cents to settle at $76.51 a barrel on the New York Mercantile Exchange.
The market's moves were also being driven by traders preparing for changes Friday to some of the stocks that make up the Russell 2000 index of smaller companies. The Russell 2000 fell 11.08, or 1.7 percent, to 633.17.
The slump in stocks made clear that anxiety is still ruling the market, after appearing to have waned last week. The Dow and other major stock indexes touched new lows for 2010 earlier this month, then regained some ground when fears about a debt blowup in Europe began to ease.
Now, the concern is that cracks are appearing in the U.S. recovery. Since last week, several reports on housing and jobs have indicated that the economy's biggest trouble spots aren't getting much better. Even manufacturing, which has been one of the strongest areas of the economy, looked weaker in one report last week. Analysts warn against drawing big conclusions from a few reports but investors will want to see some better numbers for stocks to resume their climb.
The latest numbers point to "substantive holes in the economic recovery story," said Tom Samuels, portfolio manager of the Palantir Fund in Houston.
The Federal Reserve said Wednesday that the economy is continuing to recover, but that risks remain. It signaled that the problems in Europe are a risk for the U.S.
Mike Rubino, CEO of Rubino Financial Group in Troy, Mich., said investors had been expecting the economy to improve "at a much faster level" than they're seeing. That disappointment has pulled stocks from their 2010 highs in late April.
The government is set to release its final number Friday on gross domestic product for the first quarter.
Among stocks, Nike fell $2.89, or 4 percent, to $69.63, while Bed Bath & Beyond fell $2.34, or 5.6 percent, to $39.12.
Bank of America fell 41 cents, or 2.7 percent, to $15.02 and JPMorgan dropped 86 cents, or 2.2 percent, to $38.03.
Stocks of health care companies benefited from increased demand for investments considered reliable in a weak economy. Health care and consumer products maker Johnson & Johnson rose 61 cents to $59.60.
More than three stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 4.9 billion shares, compared with 4.6 billion Wednesday.
Britain's FTSE 100 fell 1.5 percent, Germany's DAX index dropped 1.4 percent, and France's CAC-40 fell 2.4 percent. Japan's Nikkei stock average rose 0.1 percent.