NEW YORK (CNN/Money) - The Dow suffered its worst one-day selloff in six months Monday as investors ditched stocks on signs that the war with Iraq will be longer and more devastating than had been anticipated.

The Dow Jones industrial average (down 307.29 to 8214.68, Charts) tumbled 3.6 percent or 307 points, its worst drop on both a point and a percentage basis since September 3, 2002, when the Dow fell 4.1 percent or 355 points. The Nasdaq composite (down 52.06 to 1369.78, Charts) lost 3.6 percent, and the S&P 500 index (down 31.67 to 864.23, Charts) dropped 3.5 percent.

"The markets got a little premature declaring victory last week and the shorts rushed in to cover. Now enthusiasm has dissipated and the selling pressure is on," said Ned Riley, chief investment strategist at State Street Global Advisors. "People are realizing that the war is going to be longer and more drawn out than anticipated."

Monday's selloff followed one of Wall Street's strongest rallies in years. With a gain of 8.4 percent last week, the Dow industrials had their best weekly advance since 1982. The average had climbed nearly 1,000 points during the previous eight trading sessions, or 13.3 percent.

But the war euphoria came to an abrupt end Monday, when traders returned to their desks after a weekend of watching footage of tough battles and reports of U.S. casualties and the capture of U.S. soldiers.

Although it is likely to be less influential than usual, amid the war focus, Tuesday does bring a couple of significant economic reports. The March report on consumer confidence is expected to show a decline to 62.0 from 64 in February. Additionally, existing home sales in February are forecast to have fallen to a 5.80 million unit annual rate from a 6.09 million unit annual rate in January.

Despite little factual evidence on its side, Wall Street had placed heavy bets that the war would be short and swift, bolstered by rumors that Iraqi President Saddam Hussein was either injured or dead as a result of U.S. air strikes on Baghdad. (For the latest war developments, go to CNN.com.)

The news over the weekend and Monday, including an appearance by a defiant Hussein on Iraqi television, indicated otherwise, and the selling that came to the stock market was punishing.

"The events of the weekend changed market psychology and people are using that as an opportunity to take profits after the huge rally," said Peter Cardillo, director of research at Global Partners Securities. "Markets had rallied on the certainty of war and on the belief that it would be quick and with few casualties. But we're seeing that's not the case. The breaking down of the Iraqi army that was talked about in the first few days was clearly overstated."

All 30 of the blue chips on the Dow fell by at least 1 percent. Disney (DIS: down $1.34 to $17.40, Research, Estimates) was the biggest loser after a drop of 7 percent, despite being a big winner at the Oscars Sunday night. Altria Group (MO: down $1.45 to $33.59, Research, Estimates) lost 4 percent after a judge ruled that its Philip Morris unit deceived consumers into believing "light" cigarettes were healthier than regular cigarettes. The judge said Philip Morris must now pay more than $10 billion in damages.

Wal-Mart (WMT: down $2.15 to $52.52, Research, Estimates), which reiterated its estimates for sales in March despite a slowdown over the weekend as consumers stayed home to watch the latest war news, declined almost 4 percent.

Market breadth was thoroughly negative on heavy volume. On both the New York Stock Exchange and the Nasdaq, three stocks fell for every one that rose. About 1.27 billion shares traded on the NYSE and some 1.31 billion shares changed hands on the Nasdaq.

The stock market selling drove investors back to the perceived safety of U.S. Treasury bonds, which rallied sharply. The benchmark 10-year note climbed 1-4/32 points in price, its yield retreating to 3.96 percent. The dollar fell modestly against both the euro and the yen.

Oil prices soared on the prospect of a longer Middle East war, with light sweet crude futures gaining $1.69 to $28.60 a barrel in New York. The price of oil had dropped over the last week and a half while stocks were rallying. This trend reversed Monday with oil and energy stocks, including Schlumberger (SLB: down $0.87 to $38.05, Research, Estimates) and Exxon Mobil (XOM: down $0.69 to $35.31, Research, Estimates), taking a hit.

Gold rallied $3.40 to $329.50 an ounce in New York after having fallen in the flight to equities. Gold stocks were also among the sessions few advancers, with Durban Deep (DROOY: up $0.08 to $2.41, Research, Estimates) up 3 percent.

Overseas stock markets were mixed to lower, with European stocks falling sharply by the close and Asian markets closing mixed overnight.