US stocks fall sharply after ECB inaction

Stocks traded near session lows Thursday after ECB President Mario Draghi's comments dashed hopes that the central banks would raise its bond purchases of debt-ridden euro zone nations and as investors remained on edge ahead of the EU summit.

The Dow Jones Industrial Average was down 166 points around 1:30 p.m., led by JPMorgan (down 4.5 percent) and BofA (down 3.7 percent) after logging a third gain in the previous session.

 The S&P 500 and the Nasdaq also fell. The CBOE Volatility Index, widely considered the best gauge of fear in the market, traded near 30.

 All 10 S&P sectors were in negative territory, led by financials and materials.

The European Central Bank's President Mario Draghi said he didn't signal more bond purchases last week in a press conference following an interest rate decision, implying that he has stepped back from the idea of aggressive bond buying from the ECB.

 Adding to woes, Draghi said the euro zone's outlook "remains subject to high uncertainty and substantial downside risks."

 “We were definitely caught off guard with how dramatically Mario Draghi walked back from what was clearly a statement in support of bond markets with respect to the ECB,” said Dan Greenhaus, chief global strategist at BTIG. “With so much focus on austerity, the structural reform element is arguably more important because no matter what happens, these economies and markets are going to suffer through a very difficult near term period—the question is how quickly and how effectively can you emerge from that period.”

 The ECB slashed its main interest rate as the euro zone's worsening debt crisis outweighed the concern over persistently high inflation.

 The move came hours before a key EU summit which will aim to agree on a plan to defuse the crisis, with France and Germany pushing for rule changes to stricter budget discipline in the bloc.

“We’re being held hostage by Europe—headlines can move us in a flash so people are not willing to go in until there's better clarity,” said Kenny Polcari, managing director at ICAP Equities. “Market is trying to still hope that there’s going to be a pathway to a credible solution at the EU summit. If there’s no headway and the optimism doesn’t work out, the market is going to punish us very quickly.”

French President Nicolas Sarkozy and German Chancellor Angela Merkel are set to meet in Marseilles, France where Sarkozy is due to make a speech at the congress of Europe’s center-right leaders.

He and Merkel are both due to hold bilateral meetings later with Spanish Prime Minister-elect Mariano Rajoy before they head to Brussels where EU leaders meet for dinner tonight and kick off the heavily-anticipated EU summit.

Meanwhile U.S. Treasury Secretary Timothy Geithner met with Italian Prime Minister Mario Monti to lobby for action on the euro zone's debt crisis ahead of the summit.

On the economic front, weekly claims for jobless benefits tumbled 23,000 to a seasonally-adjusted 381,000, according to the Labor Department, the lowest in almost nine months. Economists surveyed by Reuters had forecast claims slipping to 395,000.

Meanwhile, wholesale inventories rose 1.6 percent in October, posting its biggest gain in five months, according to the Commerce Department. Analysts had expected a gain of 0.3 percent, according to a Reuters poll.

And former MF Global chief John Corzine is slated to appear before a congressional panel. MF Global collapsed in late October after making huge bets on European sovereign debt. (CNBC.com is streaming this event live.)

McDonald's climbed to hit a new 52-week high after the fast-food giant posted a bigger-than-expected gain in November same-store sales, helped by big gains in Asia and Europe. Rival Yum Brands edged higher, also hitting a new 52-week high.

Among earnings, Costco posted higher quarterly profit in its first quarter. And Smithfield Foods reported results that topped estimates, thanks to strong exports.

Ford pared sharp losses after the automaker reinstated a dividend of 5 cents a share, its first time in five years.

Meanwhile, IBM said it will acquire DemandTec[ for $13.20 a share in cash. The acquisition will help IBM boost its cloud-based service.