Bond prices jumped - lowering the corresponding yields - as investors sought safety in government debt. The dollar strengthened versus the euro and fell versus the yen.

The Dow Jones industrial average (INDU) lost 220 points, or 1.9%, while the broader Standard & Poor's 500 (SPX) index lost 1.8%.

The tech-heavy Nasdaq composite (COMP) lost 1.0%, fending off bigger losses thanks to gains in big tech stocks such as Microsoft (MSFT, Fortune 500) and Intel (INTC, Fortune 500).

A report released in the late afternoon showed that consumer borrowing costs increased in June at the fastest pace in seven months. The selloff seemed to pick up the pace after that.

"We're going to continue to see this choppiness until we get this financial mess behind us and until we start getting better economic news," said Ron Kiddoo, chief investment officer at Cozad Asset Management.

He said that between AIG's quarterly loss, the weak retail sales reports and the jump in jobless claims, investors are clearly not getting any relief just yet.

Friday brings earnings reports from Fannie Mae (FNM, Fortune 500) and MBIA, as well as the second-quarter read on productivity and the June report on wholesale inventories.

Financial woes: Late Wednesday, insurer AIG posted a steeper-than-expected quarterly loss of $5.36 billion due to massive writedowns related to the credit collapse. The Dow component reported a profit a year earlier. On a per-share basis, the company lost 51 cents excluding one-time items, versus forecasts for a 63-cent gain. Shares of AIG (AIG, Fortune 500) fell over 18% Thursday, dragging on the Dow.

In more bad news for financials, Citigroup (C, Fortune 500) agreed to buy back over $7 billion in auction-rate securities after the New York Attorney General said the company misled investors. Citi shares lost 6% as investors bet that third-quarter earnings will be impacted by the news. (Full story)

A variety of financial shares declined, including Bank of America (BAC, Fortune 500), Merrill Lynch (MER, Fortune 500) and Lehman Brothers (LEH, Fortune 500).

Fuel prices: U.S. light crude oil for September delivery rose $1.44 to settle at $120.02 a barrel on the New York Mercantile Exchange after ending the previous session at a three-month low.

Oil prices had slipped nearly 20% since peaking above $147 a barrel in July. But the price of crude bounced back Thursday on concerns about oil-producing Iran's nuclear program. (Full story).

Retail gas prices dropped more than a penny overnight, extending the downward trend for a 21st day, according to a survey of gas station credit card activity. (Full story).

Wal-Mart and other retailers: The world's largest retailer reported July sales at stores open a year or more rose 3%, short of analysts' expectation that sales would grow 3.4%. Wal-Mart (WMT, Fortune 500) shares fell over 6%.

Fellow discount retailer Costco (COST, Fortune 500) reported sales rose 10%, topping forecasts, while Target (TGT, Fortune 500) said sales fell 1.2% - a bigger-than-expected drop.

A variety of retailers reported lackluster sales, reflecting the end of the impact from the government stimulus checks mailed out earlier this summer.

Clothing retailers were hit particularly hard, with both Abercrombie & Fitch (ANF) and Pacific Sunwear of America (PSUN) reporting steeper-than-expected declines. Abercrombie shares fell 10.6% and Pacific Sunwear fell 8.8%.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by over three to one on volume of nearly 1.28 billion shares. On the Nasdaq, decliners topped advancers two to one on volume of 2.28 billion shares.

Economy: Consumer spending has been hit by the current slowdown, the spike in fuel and food costs and a tighter labor market.

On Thursday, the government reported that the number of Americans filing new claims for unemployment last week rose by 7,000 to 455,000. That figure represents a more than 6-year high.

Other economic news was more positive. The June pending home sales index showed sales rose 5.3% in the month versus forecasts for a drop of 1%.

Other markets: In currency trading, the dollar was flat versus the euro and inched lower versus the yen.

In the bond market, Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.92% from 4.05% late Wednesday.

COMEX gold for October delivery fell $5 to settle at $873.80 an ounce. 

The rally snapped a string of three straight losing sessions.

The Dow Jones industrial average (INDU) rose 2.9%, or 331 points. Tuesday's advance was the fourth-biggest point gain of the year for the blue-chip indicator.

Financial institutions, including AIG (AIG, Fortune 500), Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) led gainers, while Chevron (CVX, Fortune 500) was the only Dow stock to decline.

The broader Standard & Poor's 500 (SPX) index was up 2.9%. The tech-heavy Nasdaq composite (COMP) index advanced 2.8%.

Tuesday's rally was sparked early on by declines in the price of oil. But crude prices could be volatile Wednesday after the government releases its weekly energy inventory report.

Also on Wednesday, embattled mortgage financier Freddie Mac (FRE, Fortune 500) is due to report quarterly results before the opening bell.

The government-backed mortgage giant, along with its counterpart Fannie Mae (FNM, Fortune 500), will be receiving financial advice from Wall Street firm Morgan Stanley (MS, Fortune 500), the brokerage said Tuesday.

Federal Reserve: In a widely expected move, the Federal Reserve left its key fed funds rate unchanged at 2%.

The central bank, in its accompanying statement, said "economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports," and that it expects "moderate economic growth" over time.

Those comments allayed some fears about the health of the nation's economy. But the Fed statement also said inflation "has been high" and remains a "significant concern."

Overall, it was a carefully balanced statement, according to Art Hogan, chief market strategist at Jefferies & Co.

"There's something in there for everyone," Hogan said of the statement. "It's hawkish enough for people who are concerned about inflation, but the fact that there are dissenters proves that this [opinion] is not unanimous," he said.

Richard Fisher, president of the Federal Reserve Bank of Dallas, who has been a vocal supporter of actively combating inflation, preferred an increase in the target for the federal funds rate.

The Fed started cutting rates last year in response to economic weakness brought about by the housing market downturn and ensuing credit crisis. But rising prices have prompted speculation that the central bank will need to raise rates to help fight inflation.

Oil: The Fed's decision came amid a broad selloff in the oil market. Crude prices have fallen to a three-month low amid signs that global demand for petroleum products is softening.

Light, sweet crude for September delivery fell $2.24 to settle at $119.17 on the New York Mercantile Exchange.

Falling oil prices tend to support stocks because many investors think cheaper crude will continue the downward trend in gasoline prices. That would relieve some of the pressure on consumers and encourage them to spend more on discretionary items, boosting economic activity and stock prices.

Other commodities, including precious metals and crop futures, also declined.

Earnings news: After the close, Cisco Systems (CSCO, Fortune 500) posted fiscal fourth-quarter earnings and revenue that topped analysts' forecasts.

The maker of computer networking gear posted a fiscal fourth-quarter profit of $2 billion, or 33 cents a share, up 5% from the year-ago $1.9 billion, or 31 cents a share.

Excluding certain costs, earnings rose to 40 cents a share from 36 cents a year earlier. Analysts surveyed by Thomson Financial were looking for a 39-cent per share profit on sales of $10.31 billion.

Cisco is viewed as a economic bellwether. The company supplies much of the technology sector with basic components and market participants are eager to hear what CEO John Chambers has to say regarding the level of demand the company sees from its buyers.

Media conglomerate News Corp (NWS, Fortune 500). reported that fiscal fourth-quarter earnings jumped 27% on profit from the sale of assets and gains in its film, cable networks and newspaper units.

The company said net income rose to $1.13 billion, or 43 cents per share, from $890 million, or 28 cents per share, a year ago. That topped the 34 cents per share gain that analysts polled by Thomson Financial had forecast.

High-end grocery store Whole Foods (WFMI, Fortune 500) said net income tumbled 30% in its fiscal third quarter due largely to acquisition costs associated and lackluster consumer spending.

The company reported that it earned $33.9 million, or 24 cents a share, for the fiscal quarter ending July 6, down from $49.1 million, or 35 cents a share, in the same quarter last year. That fell short of the 31 cent per share gain that Wall Street was looking for.

Earlier in the day, consumer staples giant Procter & Gamble said fourth-quarter profit soared 33%, thanks to price increases, overseas sales and tax benefits.

P&G (PG, Fortune 500) said profit rose to $3.02 billion, or 92 cents per share, from $2.27 billion, or 67 cents per share, a year earlier.

Excluding tax benefits, the company earned 80 cents per share. Analysts surveyed by Thomson Financial expected 78 cents per share.

On the down side, Archer Daniels Midland (ADM, Fortune 500) said fiscal fourth-quarter profit was hurt by higher commodity prices.

The industrial agriculture company said profit fell 61% to $372 million, or 58 cents per share. Sales for the quarter rose to $21.78 billion.

From the housing sector, homebuilder D.R. Horton (DHI, Fortune 500), said it narrowed its fiscal third-quarter loss on less severe write-downs of their properties.

The company posted a loss of $339 million, or $1.26 per share, in the quarter ended June 30, compared with a loss of $823.8 million, or $2.62 per share, last year.

The results included pretax charges of $330.4 million to write down the value of inventory and other items. Analysts expected the builder to report a loss of 70 cents per share, though most analysts exclude one-time charges.

Economic news: The nation's service-oriented businesses remained in contraction in July, although by not as much as the month before, according to the Institute for Supply Management.

The ISM, a trade group of purchasing managers, said its reading of the service sector was 49.5 in July, up from 48.2 in June. That's better than economists' prediction of a reading of 48.7, according to the consensus estimate of economists surveyed by Briefing.com.

A reading below 50 signals contraction, while a reading above 50 indicates growth.

Other markets: In Asia, stocks finished mixed. European markets rallied.

Bond prices were mixed. The benchmark 10-year note declined 3/32 to 99 6/32, lifting its yield to 3.97% from 3.96% late Monday. Bond prices and yields move in opposite directions.

The 30-year long bond rose 2/32 to 96 18/32 with a yield of 4.59%. The 2-year note slipped 2/32 to 100 11/32 , raising its yield to 2.56%.

Gold prices tumbled $21.70 to $886.20 an ounce in New York.

The dollar edged higher against the euro. The 15-nation currency bought $1.5466, down from $1.5584 the day before. The dollar slipped to ¥108.10 from ¥108.26.