The sell-off wiped out the Dow's remaining gains for 2011. It put the Dow and broader stock indexes into what investors call a correction -- down 10 percent from their highs in the spring.
The drop on Wall Street was felt on State Street Thursday night.
"It worries me a good bit because I started to have faith that the economy was rebounding," said Jeff Rosencrants in Chicago on Thursday.
Across the financial markets, the day was reminiscent of the wild swings that defined the financial crisis in September and October three years ago. Gold prices briefly hit a record high. Oil fell even more than stocks -- 6 percent, or $5.30 a barrel. And frightened investors were so desperate to get into some government bonds that they were willing accept almost no return on their money.
It was the most alarming day yet in the almost uninterrupted selling that has swept Wall Street for two weeks. The Dow has lost more than 1,300 points, or 10.5 percent. By one broad measure kept by Dow Jones, almost $1.9 trillion in market value has disappeared.
For the day, the Dow closed down 512.76 points, at 11,383.68. It was the steepest point decline since Dec. 1, 2008.
Thursday's decline was the ninth-worst by points for the Dow. In percentage terms, the decline of 4.3 percent does not rank among the worst. On Black Monday in 1987, for example, the Dow fell 22 percent.
Some financial experts say the recent debt crisis in Washington in essence revealed the emperor has no clothes: The government may be out of ways -- and perhaps political will -- to fix the economy.
"Given the tone and tenor of what we've seen out of Washington DC in the last three weeks, what would they do even if they could do something? And I think that is really scaring people," said Lincoln Ellis with the Chicago-based Linn Group.
On Thursday, growing fear about the weakening U.S. economy was joined by concern in Europe that the troubled economies of Italy and Spain might need help from the European Union.
The European Union has already given financial assistance to Greece and Ireland, two countries that have struggled to pay their debts. A financial rescue package for Italy or Spain might be more than the group of countries can handle.
New unemployment numbers to be released Friday morning could deal the market another blow as job losses have been spreading to new sectors.
"They've been in industries, the heaviest layoffs that have been relatively unscathed during the last few years: retail, technology, pharmaceuticals," said John Challenger with Challenger, Gray & Christmas.
If the jobs report for the month of July is better than expected, it could be the life preserver the markets need.
Still, investors like Jeff Rosencrants, who has one daughter in college and another on the way, are getting off the roller coaster.
"I take all my money out of long term investments and put 'em in cash, you just put 'em in the bank and they get 1, 2 percent interest but it's a safe investment. That's what I've started to do," Rosencrants said.
Until a week ago, Wall Street had mostly convinced itself that the U.S. economy would improve in the second half of the year. Gas prices were falling, and Japanese factories were resuming production after disruptions from the March earthquake.
Then one report after another began to show that the economy was much weaker than first thought.
Manufacturing is barely growing. The service sector, which covers about 90 percent of the American work force, is growing at the slowest rate in a year and a half. People spent less in June than in May, the first decline since September 2009.
And the overall economy is expanding at the slowest pace since the end of the Great Recession. It grew at an annual rate of just 0.8 percent for the first six months of this year, raising the risk of another recession.
In an indication of how frightened investors are, Bank of New York Mellon said it would start charging large investors to hold their cash because they are depositing so much. The bank's clients include pension funds and large investment houses that are selling stock and need to deposit the proceeds.
Mark Luschini, chief investment strategist for Janney Montgomery Scott, an investment firm in Philadelphia, said his clients saw the move from stocks into cash as "a parking lot to sort things out."
"With the scars of 2008 still fresh," he said, "some clients don't want to miss the chance to pre-empt further damage should it come."
Wells Fargo Advisers, a financial management company in St. Louis, said clients were more nervous.
"I wouldn't say they're totally panicking. But obviously nerves are rattled," said Scott Marcouiller, chief technical market strategist there. "And I think that is simply because of the speed of the decline."
Other market indicators reinforced the risk-averse mood. Gold, which is seen as a safe investment when the stock market is turbulent, set a record price, $1,684.90 an ounce, before falling to finish the day at $1,659. Adjusted for inflation, gold is still far below the record reached in 1980.
The yield on the 10-year Treasury note fell to 2.42 percent, its lowest of the year, and the yield on the 2-year Treasury note hit its lowest ever, 0.265 percent. Bond yields fall when demand for bonds increases.
The yield on the one-month Treasury bill fell to almost nothing -- 0.008 percent. Investors were willing to accept paltry returns in exchange for holding investments they believed to be stable.
The sell-off was broad. All 10 industry groups in the Standard & Poor's 500 index fell. Energy companies lost almost 7 percent, materials companies were down 6.6 percent, and industrial companies lost more than 5 percent.
For a time, Kraft Foods was the only stock to rise among the 30 that make up the Dow industrials. Kraft announced Thursday that it would split in two, with one company focusing on snacks and the other groceries. But the selling eventually dragged Kraft under, too, and its stock finished down 52 cents, at $33.78.
Steep stock market losses like the ones of the past two weeks can be self-reinforcing. A drop in stocks erodes household wealth and raises doubts about the economic outlook.
The result can be what economists call a vicious cycle. Stock losses take a toll on consumer confidence and make people more reluctant to spend money. Consumer spending makes up 70 percent of economic output in the United States.
Kevin Cook, senior stock strategist for Zacks Investment Research in Chicago, said investors' worst fears probably won't come true.
"This is not 2008 again," he said. "We don't have a liquidity crisis, we don't have a credit crisis -- this is just profit taking."
Cook said he believes the S&P 500, which closed Thursday at 1,200.07, will trade between 1,150 and 1,250 between now and Oct. 1, at least until investors have enough information to determine whether the economy is in recession again.
Even taking into account the recent declines, stocks are still considered to be in an impressive bull market that began March 9, 2009, when the market reached its recession low.
The Dow closed that day at 6,547. Since then, it is up about 74 percent.
One year ago, the Dow closed at 10,680. About a month later, the stock market began a rally that took the Dow almost to 13,000. The catalyst was an announcement by Federal Reserve Chairman Ben Bernanke that the Fed was preparing to launch a program to buy $600 billion in government bonds to keep interest rates low and help stocks rally.
The sell-off now comes at a time when corporate profits are growing. For the S&P 500, a measure called the forward price-to-earnings ratio has fallen to about 12, well below its long-term average of 16. That means that investors who buy now are paying less for each dollar in profits.
Based on what an investor now pays for corporate profits, stocks are now trading at their lowest levels in 20 years, said Tim Courtney, chief investment officer of Burns Advisory Group in Oklahoma City.
But few companies were spared in the sell-off Thursday. Just three of the 500 stocks in the S&P 500 moved higher. General Motors fell 4 percent despite beating analyst estimates for its quarterly earnings.
The Associated Press contributed to this report.