Investors sought safety Tuesday as concerns about spiraling debt loads and disappointing corporate reports tarnished hopes for an economic recovery.
Traders turned away from stocks and put money into safe-haven assets like the dollar and Treasurys. Most major stock indexes fell 1 percent, including the Dow Jones industrial average, which lost 104 points but ended off the day's lows.
An earnings forecast from 3M Co. and a sales report from McDonald's Corp. disappointed investors. The reports weighed on the Dow and overshadowed an increased profit forecast from FedEx Corp., whose results are seen as a gauge for the health of the economy.
Questions about debt levels in places from Greece to the Middle Eastern city-state of Dubai added to investors' concerns. Meanwhile, reports in Britain and Germany signaled that manufacturing remains weak.
The unease drove the dollar and Treasury prices higher. The advancing dollar hit commodities prices, which, in turn, hurt energy and materials producers. A stronger dollar makes commodities more expensive for buyers overseas.
After the jump in stocks and commodities this year, investors are looking for clues about where the economy is headed and how best to position their portfolios for next year. Investors are uncertain of how long the environment of low interest rates and a weak dollar that helped fuel the market's rally will last.
Philip S. Dow, managing director of equity strategy at RBC Wealth Management in Minneapolis, said 3M's forecast drew attention from FedEx and that the day's retreat is in order after the steep gains in stocks over all.
"People were so enthused with FedEx then got a little disappointed with 3M," he said. "I just think it's a rest."
At the same time, there are still plenty of doubts about the economic recovery to drive cautious investors to pad their portfolios with safe havens. With the Standard & Poor's 500 index up 20.9 percent so far in 2009, many investors are looking to protect their gains.
The Dow ended down 104.14, or 1 percent, at 10,285.97 after being down as much as 140 points. It was the biggest point and percentage loss for the Dow since Nov. 27 and erased its gain for December. Only Verizon Communications Inc. rose among the 30 stocks that make up the index.
The broader S&P 500 index fell 11.31, or 1 percent, to 1,091.94, while the Nasdaq composite index fell 16.62, or 0.8 percent, to 2,172.99.
Stocks finished little changed on Monday after reassurance from Federal Reserve Chairman Ben Bernanke that interest rates will remain low to support a recovery failed to galvanize investors.
Bond prices rose, sending yields lower. The yield on the benchmark 10-year Treasury note fell to 3.39 percent from 3.43 percent late Monday.
The slump in stocks and gains in Treasurys came as credit rating agencies pointed to what they saw as ominous debt loads around the world.
Fitch Ratings lowered Greece's credit rating Tuesday because of growing debt. Meanwhile, another agency cut its ratings on six Dubai state-linked companies. Two weeks ago debt problems in Dubai pushed world markets down sharply as investors worried that the troubles would unleash a wave of failing debt.
Moody's Investors Services also said the state of public finances in the U.S. and Britain are troubling.
The drop in stocks underscored the challenges investors face. With interest rates low, those seeking stronger returns have been forced into stocks.
"If you get defensive today and head for the hills the question you have to ask yourself is where do you invest," said Rob Lutts, chief investment officer at Cabot Money Management in Salem, Mass.
The ICE Futures US dollar index, which tracks the dollar against other major currencies, rose 0.6 percent.
Gold prices fell for a third straight day, sliding $20.60 to $1,143.40 an ounce. Crude oil fell $1.31 to settle at $72.62 per barrel on the New York Mercantile Exchange.
Analysts said the rising dollar was a big force behind the move in stocks, as it has been for months.
Peter Cardillo, chief market economist at the brokerage Avalon Partners Inc. in New York, predicts the dollar will resume its slide and remove pressure from stocks.
"This is a short-term correction in the dollar and the same with the other markets and I don't think it's going to be long-lasting," he said.
Shares of 3M slumped after the consumer products maker's earnings fell short of forecasts. The stock fell 80 cents, or 1 percent, to $77.11.
McDonald's fell $1.32, or 2.1 percent, to $60.61 after the world's largest fast-food chain said monthly sales in the U.S. fell in November.
FedEx raised its earnings forecast for the November quarter late Monday. The package delivery company rose $2.36, or 2.7 percent, to $89.88. Investors watch FedEx because the volume of its business is seen as an indicator of the overall strength of the economy.
Two stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to 4.8 billion shares compared with 4.2 billion Monday.
The Russell 2000 index of smaller companies fell 5.86, or 1 percent, to 597.70.
Overseas, Britain's FTSE 100 fell 1.7 percent, Germany's DAX index slid 1.7 percent, and France's CAC-40 fell 1.4 percent. Japan's Nikkei stock average fell 0.3 percent.