Stocks on the slide

NEW YORK (CNNMoney.com) -- Stocks cut losses Wednesday afternoon, but remained deep in the red as worries about the credit and mortgage market and record-high oil prices gave investors reason to bail ahead of the Thanksgiving holiday.

The Dow Jones industrial average (Charts) lost around 120 points or nearly 1 percent with just over 2 hours left in the session. The S&P 500 (Charts) index lost 1.1 percent and the Nasdaq composite (Charts) lost 0.8 percent.

Stocks had been even weaker in mid-morning trading, but managed to recover a bit in the afternoon.

One of the factors helping the Dow was GM (Charts, Fortune 500), which recovered from a steep morning selloff on reports that GMAC, its struggling former finance unit, is taking steps to keep its mortgage unit alive.

Stocks have been whipsawed lately as investors have muddled through the ongoing housing and credit market turmoil, eyed the weak dollar and fretted over oil prices near $100 a barrel. On Tuesday the Fed issued a sluggish 2008 economic outlook, confirming other recent signs of a slowdown.

Wednesday's index of leading economic indicators and consumer sentiment readings added to the lackluster growth outlook.

Additionally, the Mortgage Banker's Association reported a 3.6 percent drop in applications last week. Separately, 47 of the 50 states saw a drop in existing home sales in the third quarter, according to a National Association of Realtors report.

"Equity markets are reacting to the economic slowdown," said Michael Strauss, chief economist at Commonfund. "There is some worry about the consumer, about discretionary business spending and about the financial sectors of the economy."

He said that there may also be some worry that the Federal Reserve is behind in addressing these issues.

Treasury prices rallied, sending the corresponding yields lower, as investors sought safety in the comparably safer haven of bonds. The benchmark 10-year note fell below 4 percent for the first time in two years.

"There's a pretty strong flight-to-quality there," Strauss said. "There's a clear bet that the Fed has further to go, even if the Fed doesn't realize it."

Policy makers meeting on Dec. 11 are widely expected to cut the fed funds rate, a key short-term interest rate by a quarter-percentage point.

Among stock movers, Freddie Mac (Charts, Fortune 500) shares continued to slip after plunging nearly 27 percent Tuesday. The government-sponsored mortgage backer reported a steep quarterly loss Tuesday and a $1.2 billion writedown due to credit losses.

Fellow mortgage lenders Countrywide Financial (Charts, Fortune 500) and Washington Mutual (Charts, Fortune 500) slipped too, while Fannie Mae (Charts) bounced after sliding through the morning.

Big banks slumped, including Merrill Lynch (Charts, Fortune 500), Lehman Brothers (Charts, Fortune 500) and Morgan Stanley (Charts, Fortune 500).

Declines were broad based, with 26 out of 30 Dow components falling, led by AIG (Charts, Fortune 500), American Express (Charts, Fortune 500), General Motors (Charts, Fortune 500), Home Depot (Charts, Fortune 500) and Intel (Charts, Fortune 500).

Intel was one of many chips falling, including Advanced Micro Devices (Charts, Fortune 500) and Micron Technology (Charts, Fortune 500). Micron slumped for a second session after a Morgan Stanley analyst initiated coverage of the company Tuesday with an "underweight" rating, AP reported.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost three to one on volume of nearly 1 billion shares. On the Nasdaq, decliners topped advancers by two to one as 1.35 billion shares changed hands.

Volume was moderate ahead of Thanksgiving. All financial markets are closed Thursday for the Thanksgiving holiday and have an abbreviated session on Friday, ending at 1:00 p.m. ET.

In economic news, the October index of Leading Economic Indicators (LEI) fell 0.5 percent, after rising 0.1 percent in the previous month, suggesting that the economic slowdown could accelerate in the months ahead. Economists surveyed by Briefing.com thought LEI would fall 0.3 percent.

The November consumer sentiment index from the University of Michigan showed a rise to 76.1 from an initial reading of 75.0, but was down from last month's 80.9. Economists thought it would hold steady, on average.

The number of Americans filing new claims for unemployment last week fell by 11,000, as expected.

U.S. light crude oil for January delivery fell $1.03 to $97 a barrel on the New York Mercantile Exchange, after having hit a record high of $99.23 in electronic overnight trading.

Oil prices were volatile after the release of the weekly oil inventories report, which showed a surprise drop in crude supplies.

COMEX gold for December delivery rose $6.90 to $793.30 an ounce.

In currency trading, the dollar fell versus the yen and the euro.