Terror, economy sink stocks

NEW YORK (CNNMoney.com) -- Stocks tanked Thursday, after gaining some momentum earlier in the week, as political turmoil in Pakistan turned deadly and downbeat economic reports took the wind out of Wall Street's sails.

The Dow Jones industrial average (INDU) fell nearly 1.4 percent. The broader S&P 500 (SPX.X) index shed nearly 1.3 percent. The tech-laden Nasdaq (COMPX) lost 1.7 percent.

Treasury prices were higher. The dollar fell against the euro and the yen. Oil and gold prices rose.

Wall Street had seen signs of recovery earlier in the week, rallying in a shortened session on Monday, then ending slightly higher in Wednesday's session. But Thursday's session was hit with bad news early on and could not shake the negative sentiment.

Former Pakistani Prime Minister Benazir Bhutto was assassinated Thursday in a suicide attack in Rawalpindi, Pakistan. Investors worry that Bhutto's assassination will cause further political strife in Pakistan, a country with nuclear capabilities, and upset world markets.

Markets were also shaken by a number of economic reports released early Thursday highlighting concerns about the strength of the economy.

"The assassination of Benazir Bhutto got the market off on a bad foot and now we're seeing a lot of selling on the negative economic news," said Fred Dickson, chief market strategist at D.A. Davidson & Co.

The number of shares changing hands Thursday has been unusually low, since many Wall Street traders are on vacation this week. This means that the market's reaction to new developments, good or bad, could be exaggerated, according to Dickson.

"In the absence of any good news, there's nothing to bring the buyers in," he added.

On the economic front, the U.S. Commerce Department said factory orders for November came in lower than expected.

Meanwhile, the U.S. Labor Department said that the number of workers applying for unemployment benefits last week was higher than expected.

On the bright side, consumer confidence in December was slightly higher than expected, despite concerns about economic instability, according to the Conference Board's Consumer Confidence Index.

Separately, the government's weekly oil inventory report showed a larger-than-expected drop in domestic crude supplies last week.

The reports helped lift bond prices Thursday, for the first time in four sessions, as the weak economic outlook drove investors to safe haven investments.

From the financial sector, Sallie Mae (SLM, Fortune 500) said Thursday that it needs to sell $205 billion worth stock to buy out certain contracts that have hindered the student lender's performance. The company also said it faces a class-action lawsuit alleging that the company steered minority students into more expensive loans, an allegation the company denied. Shares of Sallie Mae plunged nearly 7 percent.

In more bad news for Wall Street banks, Goldman Sachs analysts wrote Thursday that Citigroup (C, Fortune 500) could writedown as much as $18.7 billion in the fourth quarter and cut its dividend by 40 percent as the company struggles to overcome problems related to the credit crisis. Citigroup stock was trading down nearly 3 percent.

The Goldman analysts also said that Merrill Lynch (MER, Fortune 500) and JPMorgan (JPM, Fortune 500) could see more writedowns.

Other financial services firms were brought down by the analysts report. Shares of Bank of America (BAC, Fortune 500), Bear Stearns (BSC, Fortune 500) and Lehman Brothers (LEH, Fortune 500) were all down more than a percent in afternoon trading.

Washington Mutual (WM, Fortune 500) was down nearly 3 percent.

Market breadth was negative. On the Dow, losers beat winners by three to one on a volume of 972 million shares. On the Nasdaq, decliners beat advancers by roughly three to one on a volume of 1.41 billion shares.

U.S. light crude oil for January delivery rose 11 cents to $96.73 on the New York Mercantile Exchange.

Treasury prices rose, with the yield on the 10-year note falling to 4.19, down from 4.28 on Wednesday. Bond prices and yields move in opposite directions.

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

COMEX gold for February delivery rose $2.20 to $830.80 an ounce.