Wall Street's worst day in 3 months

NEW YORK (CNNMoney.com) -- Stocks tanked Tuesday, after a report showing a big slowdown in the services sector of the economy and cautionary comments from a Fed official amplified fears that a recession is underway or imminent.

The Dow Jones industrial average (INDU) lost about 370 points, seeing its worst one-day point loss since mid-October. The decline equaled a drop of 2.9%.

The broader Standard & Poor's 500 (SPX) index lost 44 points, its worst single-day point loss in almost 6 months. The decline equaled a drop of 3.2%.

The Nasdaq composite (COMP) fell 73 points and saw its worst single-day point loss since mid-October. The decline equaled a drop of 2.6%.

"The pebble in the pond this morning was the ISM report and then the comments from [Fed President] Lacker came out and that kind of pushed people over the edge," said Kim Caughey, senior equity analyst at Fort Pitt Capital Partners.

"This is a very volatile time, everyone is nervous and the volatility shows the degree of nervousness," Caughey added.

Stocks tumbled in January, with the Nasdaq seeing its worst start to the year ever, on fears that the credit and housing market crises will send the economy into recession, if it isn't there already.

After such a steep decline, stocks managed to bounce back for a few days last week as investors scooped up battered shares. But the rally was short-lived, with stocks erasing last week's gains in a matter of two sessions.

The speed of the retreat added to investor jitters, said Peter Dunay, investment strategist at Leeb Capital Management. "If we lost that much over three weeks, investors would have seen it as a period of consolidation, but to drop 370 points in a day is really rattling."