Another brutal day on Wall Street

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NEW YORK (CNNMoney.com) -- Stocks tumbled Thursday, extending the 2008 selloff on recession worries following comments from Federal Reserve Chairman Ben Bernanke, a big quarterly loss by Merrill Lynch and weak readings on the housing and manufacturing sectors.

Bernanke told Congress that the economic outlook has worsened and that lawmakers should enact a fiscal stimulus plan soon. Also hurting markets: morning reports showing slumping new home construction and a big drop in the Philly Fed - a key regional manufacturing reading.

The Dow Jones industrial average (INDU) lost 307 points, seeing its worst one-day point loss since Nov. 7, and leaving the blue-chip barometer at a 10-month low. The broader S&P 500 (INX) index lost 2.9 percent, and fell to its lowest point in 14 months. The Nasdaq composite fell 2 percent and hit a 10-month low.

The Russell 2000 (RUT.X) small-cap index lost 2.8 percent and hit a more than 17-month low. The Russell 2000 has now fallen over 20 percent from its all-time high reached in July of last year. The decline is the technical definition of a bear market.

After the close Thursday, IBM (IBM, Fortune 500) reported higher quarterly sales and earnings that topped estimates. In addition, Advanced Micro Devices (AMD, Fortune 500) reported a quarterly loss - narrower than analysts had expected - on higher revenue.

Also after the close Thursday, Washington Mutual (WM, Fortune 500) reported a wider quarterly loss that missed estimates, due in part to the weakening value of its mortgage portfolio. Separately, the company is being sued for appraisal fraud.

In other news, the New York Stock Exchange said it was buying rival American Stock Exchange.

Bernanke, testifying before the House Budget Committee Thursday, said that the government should act quickly to put together a fiscal stimulus plan to help consumers amid rising recession fears.

He said any plan needs to be put into effect in the next 12 months to be helpful and should be temporary, to avoid the risk of juicing the economy too much beyond the short term and not cause a big jump in the budget deficit.

President Bush also said Thursday that an economic stimulus package is needed to help the economy in the short term and that the package will be outlined on Friday. The Wall Street Journal reported that Bush has also opted to delay his campaign to extend the recent tax cuts until after an emergency stimulus package has been negotiated with Congress.

Traders are betting that the Fed will cut the fed funds rate, a key short-term interest rate that affects consumer loans, by at least a half-percentage point, at its next policy meeting that ends Jan. 30.

But one of the fears roiling stocks has been that Fed action is not enough to help the market fight off a recession in the wake of the credit and housing market crises.

"I think the market is trying to understand the parameters of what we are dealing with and how long it will take to come through this," said Beth Dater, chief investment officer at AG Asset Management.

Investors are trying to figure out if the help needed is primarily monetary or a combination of fiscal and monetary policy, she said, and if that help is going to come quickly enough.

"While the consensus has paid lip service to a slowing economy for the last year or so, the speed with which the [negative] news has come in recently has really gotten to investors," she said.

Year-to-date, the Dow is down over 8 percent, the S&P 500 is down over 9 percent and the Nasdaq has lost roughly 11.5 percent.

Since peaking in October, the Dow has lost 14 percent, the S&P 500 has lost nearly 15 percent and the Nasdaq has lost 16.5 percent.

Stocks likely have further to go on the downside before any meaningful recovery is attempted.

"There are still a whole lot of sellers crowded into the market right now, and if we get another big bout of bad news, we could end up seeing stocks lose another 10 percent," said Chris Johnson, chief investment officer at Johnson Research Group.

Merrill Lynch (MER, Fortune 500) reported a nearly $10 billion quarterly loss and said it took an $11.5 billion writedown during the quarter related to bad mortgage bets. (Full story)

Merrill shares tumbled 10.2 percent and dragged on the broader bank sector.

Bond insurers fell after ratings agency Moody's said it may cut Ambec Financial (ABK)'s financial-strength rating, a big blow for the company. Moody's said that Ambec's plan to raise cash may not be good enough considering the $5.4 billion in losses it reported in its portfolio of mortgage debt insurance. Ambec shares plunged 52 percent in active New York Stock Exchange trading.

However, declines were broad based, with all 30 of the Dow components tumbling, led by AIG (AIG, Fortune 500), Alcoa (AA, Fortune 500), Citigroup (C, Fortune 500), General Electric (GE, Fortune 500), DuPont (DD, Fortune 500) and Walt Disney (DIS, Fortune 500).

Dow component Merck (MRK, Fortune 500) and partner Schering-Plough (SGP, Fortune 500) both continued to slump on disappointing results in a clinical trial of their cholesterol drug Vytorin.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by more than five to one on volume of 2.17 billion shares. On the Nasdaq, decliners beat advancers by more than three to one on volume of 2.83 billion shares.

On the economic front, December housing starts and building permits slumped by a bigger-than-expected margin, yielding the sharpest full-year drop in new home construction in 27 years. (Full story)

The Philadelphia Fed index, a regional manufacturing read, tumbled to a reading of -20.9, versus forecasts for a small drop to -1.5. Any number below zero indicates contraction in the sector.

Separately, weekly jobless claims fell more than expected last week, the government said, helping to cool some worries about a big slowdown in the labor market sparked by the December monthly jobs report.

Treasury prices climbed, lowering the yield on the 10-year note to 3.62 percent from 3.73 percent late Wednesday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February delivery fell 74 cents to $90.10 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $1.20 to $880.80 an ounce.