Wall Street slammed again

NEW YORK (CNNMoney.com) -- Stocks tanked Thursday afternoon after Federal Reserve Chairman Ben Bernanke urged lawmakers to enact a fiscal stimulus plan soon to help consumers and the economy.

Investors also struggled with Merrill Lynch's big quarterly loss, more problems for the housing sector and a sharp drop in the Philly Fed - a key regional manufacturing reading.

The Dow Jones industrial average (INDU) lost 1.4 percent 3 hours into the session, while the broader S&P 500 (INX) index lost 1.8 percent. The Nasdaq composite fell 1.1 percent. The Russell 2000 (RUT.X) small-cap index lost 2 percent.

Bernanke, testifying before the House Budget Committee, said that the economic outlook has worsened and 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 also 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.

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.

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 now 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.

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.

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 7.6 percent and dragged on the broader bank sector.

However, declines were broad based, with 25 out of 30 Dow stocks tumbling, led by AIG (AIG, Fortune 500), Alcoa (AA, Fortune 500), Verizon Communications (VZ, 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 four to one on volume of 910 million shares. On the Nasdaq, decliners beat advancers by close to three to one on volume of 1.30 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 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.