Dow sees biggest drop in seven months and falls below 12,000. European stocks drop to lowest level of the year.
Stocks closed near session lows, and below psychologically important levels, as global worries triggered by European sovereign debt and a slowing in Chinese growth escalated after news of violence against protesters in Saudia Arabia.
The Dow Jones Industrial Average plunged 228.48 points, or 1.87 percent, to close at 11,984.61, falling through the 12,000 benchmark, in the biggest drop for the blue-chip index since Aug. 11, 2010. Intraday, the Dow fell below its 50-day moving average of 11,980.72.
The S&P 500 tumbled 24.91 points, or 1.9 percent, to close at 1,295.11, below its 50-day moving average of 1,300.13. It was the biggest drop for the broad market index since Feb. 22.
The tech-heavy Nasdaq plunged 50.70 points, or 1.84 percent, to close at 2,701.02.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose more than 8 percent to 21.88.
All key S&P 500 sectors fell, led by energy, materials and financials.
"It's the options markets way of saying, we’re not really panicking on this," Detrick said.
Detrick noted the 200-day moving average for the VIX is 21.92, and that at current levels, the VIX appears to be bumping up against—but not breaking through—that resistance level. "It could usher in a good buying opportunity," he said.
The dollar rose against a basket of currencies, which sent oil prices sharply lower earlier in the session. Oil prices, however, bounced off their lows following reports that police in Saudi Arabia's eastern stopped planned protests with non-lethal means. The news comes ahead of a planned "day of rage," in Saudia Arabia that has investors on edge.
U.S. light sweet crude traded just below $103 a barrel, while London Brent crude fell below $114. In North Africa, Libya's eastern oil cities were under siege by pro-Gaddafi forces although oil facilities appear not to have been harmed, according to Reuters.
Gold prices fell to a 10-day low near $1,405 an ounce as investors sold bullion to cover heavy losses in the equity and other commodity markets. Comex gold for March delivery declined $17.10 per troy ounce, or 1.20% to $1412.20
At the start of the session, investors were shaken by Moody’s downgrade of Spain's rating and from news out of China of a surprise trade deficit of $7.3 billion in February—the largest gap in seven years—and its first since March 2010. The unexpected news of a deficit sparked fear of a global slowdown that affected oil as well as other commodity prices.
Concerns over the unexpected Chinese trade deficit—a fact that would allow the Chinese government to keep the value of the yuan in check—are hurting materials and energy stocks, which depend on a growing Chinese economy, said Marc Pado, U.S. market strategist and technical analyst at Cantor Fitzgerald.
Base metal prices such as copper, zinc and nickel declined almost 10 percent in the last few trading sessions. Commodity names such as Rio Tinto and Vale have also seen double-digit declines in the past few days.
The news comes as technology stocks are already under pressure in the wake of Wells Fargo's downgrade of the semiconductor sector earlier this week, and Texas Instruments announcement that it's narrowing the range of its earnings guidance, Pado said.
On top of that, banks are feeling some pressure from sovereign debt issues in Europe, he said. Overnight, "A combination of factors are individually hitting the top-performing groups," Pado said. "When you get scared like that, where you don't have leadership, you see a flight to safety...that flight to safety move is a negative for the market."
A surprising gain in jobless claims and a widening of the U.S. trade deficit, didn't help, he added.
"Even a charging bull has to exhale at some point," said Pete McCorry of Keefe Bruyette & Woods. "I don't think that this is the end of it, but certainly this is the latest of the dire headlines in a long list of dire headlines," he said, referring to the spike in the Chinese deficit and the downgrading of Spanish debt.
Wells Fargo slipped along with other bank stocks despite news that the bank planned to issue a dividend with a 30 percent dividend payout ratio, and that it would buyback shares. Earlier this week, a dividend announcement by Bank of America had sent the banking sector—and the major stock market indices—higher.
Also among tech stocks, Hewlett-Packard slid after rumors, strongly denied by the tech giant, that it was selling its personal computer business. "Irresponsible reporting by Taiwan's Commercial Times, suggesting that HP might sell its PC business, should be dismissed as market rumor and speculation," the company said in a statement, according to Reuters.
McDonald's remained higher after Deutsche Bank reiterated its “buy” rating on the fast-food chain's stock in a research note. Earlier this week, the Dow component reported that sales at restaurants open at least a year rose more than expected.
On the IPO front, HCA Holdings rose after it began trading on the New York Stock Exchange. The for-profit hospital chain and its shareholders sold 126.2 million shares in an initial public offering, priced Wednesday evening, that was oversubscribed and fetched $30 a share. The $3.5 billion deal was the largest for a U.S. company taken private by private equity firms.
Molycorp gained slightly after reporting a narrower loss due to higher sales and higher prices.
Volume on the consolidated tape of the New York Stock Exchange reached 4.7 billion shares, while 1.2 billion changed hands on the NYSE floor.
Treasury prices continued to rally after a strong auction of $13 billion in 30-year bonds at a high yield of 4.569 percent and a bid-to-cover of 3.02.
The flight to safety comes on the heels of Pimco's Total Return Fund'sdecision to dump its U.S. government holdings. Bill Gross, Pimco's co-chief investment officer, has expressed concern over Treasurys because of government spending and deficits. (Read more: Why Pimco Dumped Treasurys From Biggest Fund).
In the day's economic news, jobless claims rose 26,000 to a seasonally adjusted 397,000, according to the Labor Department. Economists surveyed by Reuters had expected claims to rise to 378,000 from a slightly upwardly revised 371,000 the week before.
And the trade deficit widened by $6 billion to $46.3 billion, led by imports of oil, capital goods and cars. The gap was far more than the $41.5 billion expected by analysts, according to Reuters.