Selloff accelerates on recession fears

NEW YORK (CNNMoney.com) -- The stock selloff quickened Tuesday morning, after a surprisingly weak service sector reading exacerbated bets that the economy is in a recession.

The Dow Jones industrial average (INDU) lost 1.9% nearly 2 hours into the session, the broader Standard & Poor's 500 (SPX) index lost 2% and the Nasdaq composite (COMP) fell 1.7%.

Stocks retreated Monday as well, following last week's big rally, as investors continued to worry that the credit and housing market crises will send the economy into recession, if it isn't there already. Tuesday's news added to such worries.

Economic doom and gloom. The ISM services index, a survey of services sector executives, showed business activity falling in January for the first time in five years. The report was released nearly an hour ahead of schedule, unnerving investors at the start of trade. The report countered last week's reading on the manufacturing sector, which showed expansion. (Full Story).

"This is the most unequivocal sign we've had that the economy is weakening," said Stephen Stanley, chief economist at RBS Greenwich Capital. "We've had data pointing in that direction, but they've been all over the map and it always seemed like there was a silver lining in the weak reports."

"There is nothing in this report that was redeeming," he added. "Its simply terrible."

Bears rule the day. The stock selloff was decisive, with all 30 Dow components sliding, led by Alcoa (AA, Fortune 500), AIG (AIG, Fortune 500), General Motors (GM, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

In other corporate news, News Corp. (NWS, Fortune 500) reported higher quarterly earnings that met estimates late Monday. Shares were little changed Tuesday.

Falling oil prices gave a lift to the airline stocks and select other transportation providers. Airlines were among the few gainers on the session. The Amex Airline index added 1 percent.

KB Home (KBH, Fortune 500) and a few other homebuilders bucked the trend as well, thanks to a Banc of America Securities upgrade, Briefing.com reported.

Market breadth was negative. On the New York Stock Exchange, losers trounced winners three to one on volume of 480 million shares. On the Nasdaq, losers beat winners two to one on volume of 770 million shares.

Other markets. Treasury prices rallied, as investors sought safety in government debt, lowering the yield on the benchmark 10-year note to 3.55% from 3.64% late Monday. Bond prices and yields move in opposite directions.

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

U.S. light crude oil for March delivery fell $1.57 to $88.45 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery plunged $15.90 to $893.50 an ounce.