Stocks slump anew

NEW YORK (CNNMoney.com) -- Stocks tumbled Thursday morning as investors mulled Fed chairman Ben Bernanke's support of a government stimulus plan, Merrill Lynch's big quarterly loss and more troubles for the housing and manufacturing sector.

The Dow Jones industrial average (INDU) lost 0.9 percent over an hour into the session, while the broader S&P 500 (INX) index lost 1 percent. The Nasdaq composite fell 0.7 percent.

Stocks tumbled Wednesday on Intel (INTC, Fortune 500)'s earnings and outlook, extending the 2008 selloff that has seen the Dow and S&P 500 both lose more than 6 percent and the Nasdaq lose nearly 10 percent.

The steep selloff so far this year has reflected fears that the economy is headed for a recession or is in one already, in the wake of the housing and credit market crises.

Bernanke, testifying before the House Budget Committee, said that the government should act quickly to put together a fiscal stimulus plan to help consumers amid rising recession fears. He said it needs to be temporary and put into effect in the next 12 months, to avoid the risk of juicing the economy too much beyond the short term and not cause a big jump in the budget deficit.

The Fed chairman also said the economic outlook has worsened.

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

In corporate news, 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 5 percent and dragged on the broader bank sector.

However, declines were broad based, with 22 out of 30 Dow stocks tumbling.

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 rose, lowering the yield on the 10-year note to 3.66 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 rose 51 cents to $91.35 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $7 to $889 an ounce.