The slide meant that the Dow, which fell 76 points on Tuesday, has given back all but 127 points of its record 936-point gain of Monday, which came on optimism about the banking system in response to the government's plans to invest up to $250 billion in financial institutions.
Wednesday's sell-off began after the government's report that retail sales plunged in September by 1.2 percent - almost double the 0.7 percent analysts expected - made it clear that consumers are reluctant to spend amid a shaky economy and a punishing stock market.
The Commerce Department report was sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading came as Wall Street was refocusing its attention on the faltering economy following stepped up government efforts to revive the stagnant lending markets.
Then, during the afternoon, the release of the Beige Book, the assessment of business conditions from the Federal Reserve, added to investors' angst. The report found that the economy continued to slow in the early fall as financial and credit market problems took a turn for the worse. The central bank's report supported the market's belief that difficulties in obtaining loans have choked growth in wide swaths of the economy.
''Even though the banking sector may be returning to normal, the economy still isn't,'' said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com. ''We're in for a tough ride.''
Fed Chairman Ben Bernanke offered a similar opinion, warning in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.
Analysts have warned that the market will see continued volatility as it tries to recover from the devastating losses of the past month, including the nearly 2,400-point plunge in the Dow over the eight sessions that ended Friday. Such turbulence is typical after a huge decline, but the market's anxiety about the economy was also expected to cause gyrations in the weeks and months ahead.
Selling accelerated in the last hour of trading, a common occurrence during the eight days of heavy declines. One reason for the heavy selling: Mutual funds need to unload stock to pay investors who are bailing out of the market.
Investors apparently have come to believe that Monday's big rebound over the banking sector was overdone given the problems elsewhere in the economy.
The Dow ended down 733.08, or 7.87 percent. Wednesday's percentage drop was the biggest since the 8.04 percent of Oct. 26, 1987, which followed Black Monday, the Oct. 19 crash that sent the blue chips down 22.6 percent in a single session.
* Iceland's central bank slashed official interest rates Wednesday as it warned that the collapse of its banking system will lead to an economic contraction.
* The major industrial nations announced Wednesday they will hold a global summit to forge common action to prevent another economic meltdown. Britain called for radical restructuring of international institutions like the International Monetary Fund and World Bank and the participation of emerging economies such as China and India.
