Investors who have been waiting for a genuine "correction" in U.S. stock prices may be on the verge of getting their wish.
The market's broad decline Tuesday, triggered by fear that the housing sector's woes could zap the economy, was the second big setback in two weeks -- which may be enough to shake out investors who have been thinking about selling but haven't yet, analysts said.
"If this really does turn into a nasty downturn in housing, no one really knows what the implications for the economy will be," said Kevin Bannon, chief investment officer at Bank of New York. "These things basically raise concern about whether we're slipping into a recession."
Those worries fueled heavy selling Tuesday that began in mid-morning and continued the rest of the session. The few attempts to rally were quickly quashed.
In Asia early today, most markets followed Wall Street lower. Japan's Nikkei-225 index was down 3%.
Major U.S. market indexes closed modestly above their recent lows. That will be a key test today: Do the indexes barrel through those lows?
On Tuesday, the Dow Jones industrial average finished down 242.66 points, or 2%, at 12,075.96. The recent low was 12,050 on March 5, before stocks stabilized and rallied again.
Broader indexes also took hefty hits, with financial-related stocks leading the way down. The Standard & Poor's 500 fell 28.65 points, or 2%, to 1,377.95.
The Nasdaq composite lost 51.72 points, or 2.2%, to 2,350.57.
As the stock market sank, the dollar tumbled against the yen, suggesting that some speculators who had borrowed in cheap yen to invest worldwide were selling what they bought with those loans and repaying the debt.
A "flight to quality" by nervous investors pushed Treasury bond yields down. The 10-year T-note ended at 4.49%, down from 4.55% on Monday.
The session was something of a repeat performance of what happened Feb. 27, when the Dow plummeted 416 points, or 3.3%, the biggest one-day drop in nearly four years.
That sell-off also had been triggered in part by jitters over rising defaults by sub-prime mortgage borrowers, or those with poor credit histories. A plunge in Chinese stocks also pulled the U.S. market down that day. This time, Wall Street couldn't blame China: The Shanghai market had closed modestly higher Tuesday, before U.S. trading opened.
Early in the day, Accredited Home Lenders, a big sub-prime lender, tumbled after it warned that it was having trouble paying its creditors. That spurred another dive in financial and housing-related stocks.
Data from the Mortgage Bankers Assn., showing a jump in mortgage loan delinquencies in the fourth quarter, added to the downbeat sentiment. So did a government report that retail sales rose just 0.1% in February.
"People are not confident that the American consumer is going to maintain their spending habits," said Charles Stamey, who helps manage $14 billion at Manning & Napier Advisors.
Recession fears could fuel the first market correction in four years, some analysts say. A correction is a drop of 10% to 15% in key market indexes. The Dow is down 5.6% from its record high reached Feb. 20. The S&P 500 is down 5.6% from its six-year high reached the same day.
Among Tuesday's market highlights:
* Losers swamped winners by nearly 5 to 1 on the New York Stock Exchange, although trading volume didn't reach the level of the Feb. 27 sell-off.
* Smaller stocks fell more sharply than blue chips. The Russell 2,000 small-stock index dropped 2.5%.
* The dollar slid to 116.52 yen in New York from 117.61 on Monday in a renewed unwinding of the "carry trade" of yen loans used for speculation.
* Accredited Home plummeted $7.43 to $3.97. Among other lenders, NovaStar Financial lost 81 cents to $3.43, Impac Mortgage dropped 56 cents to $4.45, Washington Mutual slid $2.11 to $39.79 and Countrywide Financial was down $1.65 to $33.49.
* Shares of major brokerages, which have been creditors of mortgage lenders, were broadly lower. Bear Stearns plunged $10.18 to $142.97 and Merrill Lynch sank $3.75 to $79.74.
Goldman Sachs fell $3.57 to $199.03 despite reporting record earnings for the quarter.
* Among home builders, KB Home fell $2.50 to $43.86 and Lennar lost $2.07 to $43.83.
* Moody's dropped $4.01 to $59.56 on concerns that rising mortgage defaults will slow demand for ratings of securities backed by home loans.
* Energy stocks slipped as near-term crude oil futures fell 98 cents to $57.93 a barrel, the fourth straight decline.
* Among the day's few winners were grocer Kroger, up 53 cents to $26.29, and communications-services firm J2 Global, up $2.53 to $27.23. Both issued upbeat earnings reports.