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.

The anxiety on Thursday increased after the Commerce 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.

Disappointing results from home builders including Pulte Homes Inc. and D.R. Horton Inc. - squeezed by a sluggish environment from home sales and continued defaults in subprime loans - weighed heavily on the market. Jitters also remain throughout the market that the number of private-equity deals - a main driver of the market's record run - might dry up because buyout shops are having difficulties accessing credit.

"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."

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 would not 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 were not feeling Thursday that such a lofty level was justified. In early afternoon trading, the Dow plunged 285.40, or 2.07 percent, to 13,499.67, after falling by as much 323 points.

Broader stock indicators were also sharply lower. The Standard & Poor's 500 index dropped 35.89, or 2.36 percent, to 1,482.20 and the Nasdaq composite index tumbled 59.62, or 2.25 percent, to 2,588.55.

Thursday marked the seventh straight session in which the market has been unable to put together back-to-back gains or losses. On Wednesday, the Dow rose 68 points.

The steep decline in stocks has been a boon for the Treasury market as traders shifted cash into safer investments. The yield on the benchmark 10-year Treasury note fell to 4.82 percent from 4.90 percent late Wednesday.

Meanwhile, a barrel of crude oil was up 27 cents at $76.15 on the New York Mercantile Exchange, feeding the market's worries about inflation. The dollar was mixed against other major currencies, while gold prices were lower.

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 4 to 3 basis on the New York Stock Exchange, where volume came to almost 1.18 billion shares in late morning trading.

"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."

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 (?158.19 billion), durable goods excluding transportation equipment had an unexpected drop.

In addition, 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.

Ford Motor rose 27 cents, or 3.3 percent, to $8.24 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 $4.52, or 4.9 percent, to $88.27 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 $8.44, or 6.2 percent, to $145.70. 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 72 cents, or 4.1 percent, to $16.76 after it posted a fiscal third-quarter loss on charges to write down the value of unsold inventory and deposits on land.

Pulte fell $1.22, or 5.8 percent, to $19.45 after it posted a second-quarter loss amid the struggling housing market.

Dow Chemical Co. dropped $2.46, or 5.4 percent, to $43.21 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.

The Russell 2000 index of smaller companies fell 23.70, or 2.92 percent, to 788.80.

European stocks fell sharply in response to the drop in New York. Britain's FTSE 100 dropped 1.74 percent, Germany's DAX index dropped 1.57 percent, and France's CAC-40 fell 1.64 percent. Earlier, Japan's Nikkei stock average closed up 0.88 percent.

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