There was no let-up in the flight from stocks and bonds Thursday as the Dow Jones industrial average plunged 353 points and wiped out almost two months of gains.
A day after the Federal Reserve roiled U.S financial markets when it said it could step back from its aggressive economic stimulus program later this year, financial markets continued to slide. A slowdown in Chinese manufacturing added to Wall Street's worries.
The Dow's drop — which knocked the average down 2.3 percent to 14,758.32 — was its biggest since November 2011. It comes just three weeks after the blue-chip index reached an all-time high of 15,409.
The Standard & Poor's 500 lost 40.74 points, or 2.5 percent, to 1,588.19. It also reached a record high last month, peaking at 1,669.
Small-company stocks fell more than the rest of the market, a sign that investors are aggressively reducing risk.
In U.S. government debt, the yield on the benchmark 10-year note rose to its highest level since August 2011.
A Fed policy statement and comments from Chairman Ben Bernanke started the selling in stocks and bonds Wednesday. Bernanke said the Fed expects to scale back its massive bond-buying program later this year and end it entirely by mid-2014 if the economy continues to improve.
The bank has been buying $85 billion a month in Treasury and mortgage bonds, a program that has kept borrowing costs near historic lows for consumers and business. It has also helped boost the stock market.
Alec Young, a global equity strategist at S&P Capital IQ, said investors weren't expecting Bernanke to say the program could end so quickly, and are adjusting their portfolios in anticipation of higher U.S. interest rates.
"What we're seeing is a pretty significant sea-change in investor strategy," Young said.
As financial markets dropped, investors likely put the proceeds of their sales in cash as they waited for the dust to settle, said Quincy Krosby, a market strategist at Prudential Financial.
Investors "are raising cash right now, for fear the deterioration will continue," said Krosby.
The yield on the 10-year Treasury note rose to 2.41 percent, from 2.35 percent Wednesday. It's up sharply since May 3, when it hit a year low of 1.63 percent.
Government bonds are used as benchmarks for mortgage rates. The sharp increase in yields prompted investors to sell the stocks of homebuilders, whose business could be hurt if the pace of home buying slows down. Even an encouraging report on home sales Thursday failed to arrest the slide.
PulteGroup plunged $1.89, or 9.1 percent, to $18.87. D.R. Horton fell $2.13, also 9.1 percent, to $21.31.
Markets were also unnerved after manufacturing in China slowed at a faster pace this month as demand weakened. That added to concerns about growth in the world's second-largest economy. A monthly purchasing managers index from HSBC fell to a nine-month low of 48.3 in June. Numbers below 50 indicate a contraction.
In commodities trading, gold plunged to its lowest point since September 2010, falling $87.80, or 6.4 percent, to $1,286.20 an ounce.
Traders sold the precious metal as its appeal as insurance against inflation and a weak dollar faded. Both became less of an issue after the Fed said it was contemplating an end to its bond-buying program.
The rising dollar pushed oil prices lower. A stronger dollar makes oil more expensive for holders of other currencies. The price of crude oil fell $2.84, or 2.9 percent, to finish at $95.40 a barrel in New York, its biggest drop since November
Some investors said the sell-off in stocks may be overdone. The Fed is considering easing back on its stimulus because the economy is improving. The central bank has upgraded its outlook for unemployment and economic growth.
The S&P 500 is still up 11.3 percent, for the year, not far from its full-year increase of 13.4 percent last year.
"People are overreacting a little bit," said Gene Goldman, head of research at Cetera Financial Group. "It goes back to the fundamentals, the economy is improving."
In other trading, the Nasdaq composite fell 78.57 points, or 2.3 percent, to 3,364.63.
Among other stocks making big moves:
— GameStop, a video game store chain that sells new and used games, rose $2.41, or 6.3 percent, to $40.94 after Microsoft backpedaled and said that there will be no limitations on sharing games on its upcoming Xbox One gaming console.
— Rite Aid fell 23 cents, or 7.4 percent, to $2.88 after the nation's third-largest drugstore chain lowered its forecast for 2014 earnings.