The stock market suffered its worst drubbing in almost a month Friday as new troubles in the financial sector suggested that damage from the sub-prime crisis still had a long way to go.
The Dow Jones industrial average slumped more than 300 points after insurance giant American International Group Inc. reported a brutal fourth-quarter loss and a research report predicted that Wall Street's mortgage-related losses would reach $600 billion.
Financial stocks led the way down, as they have for much of the last year.
The developments wiped out recent hopes that the sub-prime fallout was easing, and left some investors with the feeling that economic and market turmoil would persist through at least the first half of the year.
"We are in a process of winding out this great party that they had on Wall Street for this junk that went on for three or four years," said Greg Church, chief investment officer at Church Capital Management in Yardley, Pa., who predicted more pain in the months ahead. "We might be in the fourth or fifth inning. There's more to come."
Also depressing stocks was news that an index of business activity in the Chicago area sank much more than expected last month to its lowest level since December 2001.
The Dow Jones industrial average tumbled 315.79 points, or 2.5%, to 12,266.39. The blue-chip indicator is down 7.5% since the start of the year, but it remains above its recent low of 11,971 reached on Jan. 22.
The Standard & Poor's 500 slumped 37.05 points, or 2.7%, to 1,330.63. It's down 9.4% this year.
Investors continued a mad dash to the safety of Treasury securities. The yield on the two-year note slid to 1.64% from 1.82% late Thursday and 2% late Wednesday. The yield has been cut almost in half from the start of the year, when it stood at 3.06%.
But the upheaval in the municipal-bond market continued as large investors dumped their holdings, pushing yields up, amid rumors that hedge funds were liquidating muni bonds they had bought on credit. The turmoil has eaten into the value of muni-bond funds owned by many individual investors.
Stocks had picked up early in the week when it appeared that the fortunes of beleaguered bond insurers, which have backed billions of dollars in sub-prime securities, were improving. But the enthusiasm was soon overtaken by fears that more sub-prime bombs would go off.
