“Selling causes more selling. People panic and want to cut their losses,” said David Kovacs, a quantitative investment strategist at Turner Investment Partners in Berwyn, Pa. “Everyday now, you have more and more investors leaning towards the camp that yes, there is going to be a recession, and it could be a severe one.”

Manufacturers, hit hard by the housing downturn, are facing new woes. The Fed said on Thursday that business at Philadelphia-area manufacturers, a bellwether for the industry, slowed significantly. A similar drop occurred in early 2001 - just before the onset of the last recession. The Fed report was the first of a steady drumbeat of poor economic news that sent the main stock indexes deep into the red. The S&P 500 tumbled 2.9 per cent, below its low for last year, set in March. It closed at 1,333.25, down 39.95 points.

Hints from Ben S Bernanke, the Fed chairman, that the central bank would lower interest rates at its meeting later this month left many investors unimpressed. In a testimony before the Congress on Thursday, Bernanke promised to support a government stimulus package to prop up the ailing economy.

Some market watchers said the chairman was leaning on government support in lieu of aggressively cutting rates. “The market is frustrated with Bernanke,” Kovacs said. “Bernanke said it would be nice to have an economic stimulus package to help him with his fight. You didn’t see Greenspan asking for help.”