Investors who had been able to shrug off discomfort about subprime mortgage problems and a more difficult environment for corporate borrowing appeared to finally succumb to those concerns. The Dow's drop is the biggest since it plummeted 416 points on Feb. 27 after a nearly 10 percent decline in Chinese stock markets.

Traders assemble at a post on the floor of the New York Stock Exchange, Thursday, July 26, 2007. Wall Street fell sharply Thursday, extending its weeks-long streak of volatility after disappointing home sales figures added to investors' increasing uneasiness about the mortgage and corporate lending markets.[AP]

Feeding the selling were concerns that higher corporate borrowing costs will curb the rapid pace of takeovers that have driven major indexes this year. Investors also feared the sluggish environment for home sales and continued defaults in subprime loans would spur debt defaults and weigh on corporate earnings.

"Worries that have been out there for the past couple of years are coming to a head right now," said investment strategist Edward Yardeni, president of Yardeni Research Inc. "It's show time."

Thursday's trading was the latest in a series of frenetic sessions over the past month -- many accompanied by triple-digit swings in the Dow -- as investors sold on worries about the subprime fallout or bought on optimism that there wouldn't be any widespread problems caused by mortgage failures. Many analysts have described the back-and-forth trading as overwrought and based more on gut emotion than careful consideration of market and economic fundamentals.

Perhaps the clearest sign that investors had abandoned caution was a July 12 rally that hurtled the Dow up 283 points -- without any discernible catalyst and before Wall Street had had a chance to see the bulk of second-quarter earnings. When those earnings reports started flowing in, many turned out to be a sobering influence on the market, including news from Countrywide Financial Corp.

So, while the Dow passed 14,000 for the first time last week, investors obviously weren't feeling Thursday that such a lofty level was justified. In mid afternoon trading, the Dow plunged 351.41, or 2.55 percent, to 13,433.66, near its low of the session.

The Standard & Poor's 500 index dropped 43.91, or 2.89 percent, to 1,474.18 and the Nasdaq composite index tumbled 72.29, or 2.73 percent, to 2,575.88. The Russell 2000 index of smaller companies fell 28.96, or 3.56 percent, to 783.54.

The declines triggered a global selloff in stocks, causing minor losses in Europe to accelerate rapidly along with the Dow's drop. In Europe, Britain's FTSE 100 closed down 3.15 percent, Germany's DAX index dropped 2.39 percent, and France's CAC-40 fell 2.78 percent.

Markets were closed in Asia before the rout got under way. Japan's Nikke stock average closed up 0.88 percent and the Shanghai stock market composite added 0.52 percent to an all-time high.

Investors' global flight from equities was a boon for US Treasurys as traders shifted cash into safer investments. Bonds rallied, with the yield on the benchmark 10-year Treasury note falling to 4.80 percent from 4.90 percent late Wednesday.

Wall Street also found more immediate reasons to sell during the session. Among them was disappointing home sales figures released by the Commerce Department, which further eroded confidence in the housing industry's ability to rebound.

The department reported that sales of new homes fell 6.6 percent last month to a seasonally adjusted annual rate of 834,000 units, more than triple what had been expected and the largest percentage drop since sales fell by 12.7 percent in January.

This boosted anxiety after quarterly results from home builders including Pulte Homes Inc. and D.R. Horton Inc. were squeezed by a sluggish environment from home sales and continued defaults in subprime loans.

"Wall Street continues to walk a wall of worry," said Ryan Larson, a senior equity trader at Voyageur Asset Management. "The housing market continues to be a story, and nobody knows when it will rebound. But, the real concerns are about credit and oil pushing higher."

Also stunting stocks was a disappointing durable goods report released by the Commerce Department. Though sales of big-ticket items increased by 1.4 percent last month to a seasonally adjusted $217.07 billion, durable goods excluding transportation equipment had an unexpected drop.

The Labor Department reported that jobless claims fell by 2,000 to 301,000 in the week ended July 21, slightly better than analysts' expectations.

Investors also reacted negatively as oil prices climbed to almost $77 per barrel during the session, stoking the market's worries about inflation. However, crude pared gains in the afternoon when a barrel of light sweet crude fell 75 cents at $75.13.

It all led to a frantic day for stock traders.

"It has been pretty volatile as of late, but now fears about a credit crunch are spreading more than they have in the past -- and that's causing this drop," said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds. "That's hurting the financials, and now energy companies are joining the party because oil is so high. They make up a large part of the S&P 500."

Wall Street, now at the peak of second-quarter earnings season, has been extremely volatile lately -- a signature of typically slower trading that has been heightened by record runs in major market indexes. On Thursday, declining issues beat advancers by a 15 to 1 basis on the New York Stock Exchange, where volume came to almost 1.54 billion shares.

Ford Motor rose 22 cents, or 2.9 percent, to $8.20 after it reported cost-cutting and a turnaround in its core automotive operations pushed its second-quarter to a profit. The company had posted seven quarters of losses as it grappled with sluggish sales and a major overhaul of its operations.

Dow component Exxon Mobil's disappointing second-quarter results also weighed on the overall market, even as energy prices continued to spike. Shares fell $4.30, or 4.6 percent, to $88.49 after it reported a smaller profit than analysts expected.

The Nasdaq's losses weren't as steep as other major indexes during the session due to strength from Apple Inc., which surged $7.82, or 5.7 percent, to $145.08. The iPod and iPhone maker's earnings easily surpassed Wall Street projections late Wednesday due to strong sales from its computer offerings.

Home builders sank after several disappointing reports. D.R. Horton fell 48 cents, or 2.8 percent, to $17 after it posted a fiscal third-quarter loss on charges to write down the value of unsold inventory and deposits on land.

Pulte fell 99 cents, or 5 percent, to $19.68 after it posted a second-quarter loss amid the struggling housing market.

Dow Chemical Co. dropped $2.28, or 5 percent, to $43.39 after second-quarter results missed expectations. The company said profit during the quarter rose 2 percent as strong international growth offset weakness in the North American housing and automotive sectors.