The Philadelphia Federal Reserve Bank said its business activity index was at 0.0 in August versus 9.2 in July. Economists polled by Reuters had forecast a reading of 9.0.

Any reading above zero indicates growth in the region's manufacturing sector.

The blue-chip Dow average fell more than 10 percent from its record closing high above 14,000 in July.

The NYSE said it instituted the curbs at 12:01 p.m. EST. The New York Stock Exchange Composite Index <.NYA>, used to determine when to begin trading curbs, was down more than 190 points.

The trading curbs require that all program selling of S&P 500 stocks must be on an up-tick.

The Dow Jones industrial average <.DJI> was down 264.11 points, or 2.05 percent, at 12,597.36. The Standard & Poor's 500 Index <.SPX> was down 29.60 points, or 2.10 percent, at 1,377.10. The Nasdaq Composite Index <.IXIC> was down 54.28 points, or 2.21 percent, at 2,404.55.

Investors' confidence, already diminished by months of bad news about mortgages and credit, took a further drubbing after Countrywide, the nation's largest mortgage lender, said it was forced to draw on an $11.5 billion credit line to fund operations.

Wall Street seemed unfazed as the New York Fed _ which carries out the central bank's market operation _ announced an overnight repurchase agreement worth $12 billion. This was on top of a 14-day "repo" worth $5 billion announced before the market opened.

Central banks around the world have been supplying billions of funds to banks in the past week to make cash available for lending and keep interest rates from rising amid signs that credit was drying up. The Fed uses a repo to buy securities from dealers, who then deposit the money into commercial banks.

But, it has done little to offset fears about steeper losses for financial institutions squeezed by weeks of volatility that showed no signs of abating. Analysts contend many institutional investors want the Fed to be even more decisive.

"The concern out there is how bad are these problems with some of the financials, and everyone is looking for the Fed to aggressively cut rates to bail out the market," said Peter Dunay, an investment strategist with New York-based Leeb Capital Management. "The Fed is not eager to cut rates each time the market declines, and they're sending a message to the market that you might be on your own for a little bit."

And, a sell-off overseas offered little reason to try to stanch the bleeding a day after the Dow closed below the 13,000 mark for the first time since April and the Standard & Poor's 500 index moved into negative territory for the year. Both the Dow and the S&P 500 have dropped 9 percent from their highs this year.

In midday trading, the Dow tumbled 264.11, or 2.05 percent, to 12,597.36 _ near its lows of the session.

The S&P shed 22.03, or 1.57 percent, at 1,384.67, and the Nasdaq composite index dropped 37.43, or 1.52 percent, to 2,421.40. The Russell 2000 index of smaller companies _ which has been beaten down more than others this year _ fell 1.89, or 0.25 percent, to 749.65.

Bonds continued their rally as investors fled into safer securities. The yield on the benchmark 10-year Treasury note fell to 4.66 percent from 4.72 percent late Wednesday. Investors have also been hoping that policymakers might lower interest rates to help bolster the economy, which is a positive step for Treasurys.

However, St. Louis Fed President William Poole told Bloomberg Television after the closing bell Wednesday it wasn't necessary for the central bank to consider lowering short-term interest rates before the regularly scheduled meeting of its rate-setting committee next month.

The Fed left rates unchanged at its last meeting at 5.25 percent, where it has stood since last summer. However, policymakers said during their commentary that inflation continues to be a worry, and also recognized the debt and credit crunch for the first time.

Alexander Paris, an economist and market analyst for Barrington Research, warned not to read too much into what Poole or other Fed governors might say. These days investors are looking for more action than words out of the central bank.

"Every time there's a Fed meeting, everybody is going to give speeches afterward _ they are really just using these people to get their thoughts out," he said. "Nobody was even expecting a cut in rates last time around, but something more balanced to recognize the fact the economy and credit markets have gotten much weaker."

Adding to the unease, the yen rose to a one-year high against the dollar, stirring concern that some investors were getting out of a trading strategy referred to as the yen carry trade _ using the Japanese currency to acquire higher-yielding assets elsewhere. The dollar was down against most major currencies on Thursday.

The Commerce Department reported that construction of new homes fell to the lowest level in more than a decade in July as builders continued to struggle with the steepest housing slump since 1991.

Countrywide fell $3.44, or 16.2 percent, at $17.85 after the mortgage lender borrowed $11.5 billion from a group of 40 banks to fund loans, in a move that shows just how deep the lending crisis has become. The company has been slammed as the credit crunch has driven a number of its smaller peers to bankruptcy.

J.C. Penney Co. was among the stocks that rose Thursday, having reported that second-quarter profit edged up nearly 2 percent year-over-year. The results topped Wall Street projections at a time when many on Wall Street have been concerned that consumer spending has slowed, which was reflected in comments from Wal-Mart Stores Inc. and Home Depot Inc. earlier this week.

J.C. Penney shares rose 95 cents to $63.52. Wal-Mart, the world's largest retailer, rose 11 cents to $43.39. Home Depot, the world's largest home improvement chain, fell 22 cents to $33.14.

Advancing issues outpaced decliners by a 2 to 1 basis on the New York Stock Exchange, where volume came to 666.9 million shares.

Light, sweet crude fell $2.70 to $70.63 per barrel on the New York Mercantile Exchange, giving back Wednesday's gains as storms brewing in the Caribbean didn't appear to pose a threat to energy operations. Analysts believe worries about the economy, and stocks, have also struck fear among oil investors.

Overseas, markets reacted to the declines in the U.S. Britain's FTSE 100 fell 3.05 percent, Germany's DAX index fell 1.86 percent, and France's CAC-40 fell 2.52 percent. In Asia, Japan's Nikkei stock average fell 1.99 percent. Hong Kong's Hang Seng Index fell 3.3 percent, while the often-volatile Shanghai Composite Exchange fell 2.1 percent.