Stocks tumbled in the final hour of trading to close lower as investors took profits ahead of a key government jobs report on Friday, and as energy shares extended losses after crude oil plunged below $100.
The Dow Jones Industrial Average fell 139.41 points, or 1.1 percent to close at 12,584.17, after sinking more than 200 at one point in the last hour of trading.
The S&P 500 fell 12.22 points, or 0.9 percent, to close at 1,335.10, while the Nasdaq declined 13.51 points, or 0.5 percent to close at 2,814.72. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose nearly 8 percent above 18.
All key S&P 500 sectors fell, led by energy, telecom and materials.
"People are a little bit nervous in front of tomorrow’s nonfarm payroll report," said Kenneth Polcari, managing director at ICAP Equities.
Already this week, investors learned private sector job growth was slowing, and unemployment claims rose more than expected, Polcari said.
While the broader market was higher for a good part of the day, there was "no real sense of strength" in the market, he added.
"And then….sellers took advantage once again of any perceived strength and said it's time to take money off the table," Polcari said. He added, however, that while the market was down significantly, the losses didn't compare to the sharp drops in commodity prices, and there was little sense of panic on the trading floor.
Earlier, as oil prices tumbled to less than $100 a barrel, retail stocks gained, a relationship that Jim Paulsen, Chief Investment Strategist at Wells Capital Management doesn't think is coincidental.
"Oil prices historically have been a huge determinant for the direction of consumer discretionary stocks, relative to the market," Paulsen said.
Retail stocks could do even better if job growth rebounds, he added. In fact, the slowly strengthening job market has lent support to consumer discretionary stocks, which would have been hurt more by the rising price of crude oil since the fall, Paulsen said.
Oil prices fell sharply after the market settled as the CME raised price limits on crude oil, heating oil and RBOB futures until 5:15 p.m today, according to a CME spokesperson. Oil slid throughout Thursday's session amid concern about a reduction in demand, given high gas prices, and rising interest rates.
U.S. light crude settled at $99.80 after falling $9.44 or 8.6 percent. London Brent crude fell nearly 9 percent to below $111.
The dollar jumped against a basket of currencies as investors took comments by European Central Bank President Jean-Claude Trichet to mean a rate rise wasn't likely next month but could happen in July. The ECB left rates unchanged at 1.25 on Thursday.
And silver futures continued to plunge, setting 8% lower at $36.23 an ounce, while gold futures fell more than 2 percent to $1,480.90. Silver has had its worst four-day drop since 1983, according to Bespoke Investments. (Read more: Silver a Warning Sign for Everyone?)
In earnings news, General Motors traded flat to slightly lower despite beating both profit and revenue expectations. The once bankrupt automaker credited sales in North America and Asia for the gains.
And the Nasdaq got a lift from a strong performance by Electronic Arts after the video game publisher soundly beat expectations. Wedbush raised the video game maker's price target to $27 a share from $21.50, while S&P Equity raised the company to "sell" from "strong sell."
JDS Uniphase soared to top the S&P 500 index after the telecom communications equipment firm beat revenue estimates.BMC Software also jumped after the software company posted results above expectations, as bookings for new licenses jumped 20 percent. In addition, Jefferies and Barclays both raised their price targets on the firm.
And Whole Foods Market rose after the upscale grocery store chain beat expectations and raised its full-year profit forecast. At least two brokerages raised their target price on the firm while William Blair upgraded its rating on the firm to "outperform."
But Comcast shares slipped after the new parent of CNBC was removed from the UBS U.S. Key Calls list but raised its price target to $30 from $20. In addition, Nomura raised its price target on the firm to $32 from $29. On Tuesday, Comcast reported a profit that improved from a year earlier and topped expectations as it benefited from ad sales and boosted its Internet and phone subscriber total.
Of the 419 companies reporting earnings so far, representing 84 percent of all S&P 500 companies, 68 percent beat earnings expectations and 67 percent beat revenue expectations.
Cisco edged higher following news that the tech bellwether is expected to streamline its sales, services and engineering operations.
American International Group slumped after news the U.S. Treasury, which owns 92 percent of AIG, and its bankers, don't agree on where to price the deal, CNBC reported, citing people familiar with the matter. Treasury officials want to price the offering at about $31, close to where it is currently trading, while underwriters argue the deal is likely to sell more quickly at a lower price.
AIG was expected to post earnings after-the-bell tonight along with Kraft and Visa .
Many retail stores did better in April than analysts had expected, according to monthly sales reports, although retailers say they face headwinds from rising costs, higher gas prices, and slow job gains. Sales for 25 retailers tracked by Thomson Reuters gained 8.9 percent in April, better than the 8.2 percent forecasted.
Volume on the consolidated tape of the New York Stock Exchange was 4.6 billion shares, while 1.1 billion shares changed hands on the NYSE floor.
The market's relative weakness on Thursday could turn around tomorrow if the government jobs support shows some strength, said Dan Cook, CEO of IG Markets. "We might see stocks get a foothold again and start to climb," Cook said.
But Cook believes the market faces significant economic headwinds at a time when the Federal Reserve is likely to step away from stimulating the economy further. Those pressures, combined with the nation's severe fiscal troubles, could cause investors to push the S&P 500 Index to 1,220. It is currently trading at about 1,340, down from a high of 1,363.60 reached on April 29.
"If I looked out four or five months, I can justify 1,220 a lot easier than I can justify 1,500," Cook said.
On the economic front, initial claims for unemployment rose 43,000 to 474,000 from an upwardly revised 431,000 the week before, the Labor Department reported Thursday. Economists surveyed by Reuters had expected claims to drop to 410,000.
The news comes a day after a report showing a slowdown in the pace of private payroll growth and a decline in job cuts.
Nonfarm productivity in the first quarter, meanwhile, rose at a 1.6 percent annual rate, down from a 2.9 percent pace in the fourth quarter, the Labor Department also reported.
The closely-watched monthly nonfarm payroll report from the government for April will be reported on Friday. Economists expect the nation added 186,000 jobs, according to an estimate from Reuters.
European shares closed lower, dragged down by banks.