Wall Street's worst day in months

NEW YORK (CNNMoney.com) -- Stocks tumbled Thursday after the Obama administration announced a proposal to increase regulation of the nation's biggest financial firms, including limiting the size and scope of their trading operations.

The Dow Jones industrial average (INDU) fell 213 points, or 2%. The S&P 500 index (SPX) slid 21 points, or 1.9%. The Nasdaq composite (COMP) lost 25 points, or 1.1%. The three gauges saw the biggest one-day point declines since late October.

Stocks had fallen through the morning as lingering worries about China's lending practices hit commodities and the broader market. Reports showing a rise in jobless claims and a drop in manufacturing activity added to the pressure, overshadowing Goldman Sachs' better-than-expected profit report.

But declines accelerated as investors geared up for and then dissected the White House's afternoon announcement.

"China is still lingering today and then the Obama announcement comes out and that's when you saw the selling really pick up," said Steven Goldman, market strategist at Weeden & Co.

Obama called for greater government regulation of the nation's biggest financial institutions, including limiting commercial banks ability to make high-risk trades and stopping them from owning or investing in hedge funds.

This would separate commercial and investment banks, a throwback to a Depression-era law that was basically thrown out a decade ago.

Big banks such as JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) would be impacted in particular.

The plan was in tune with the proposal of former Fed president and current economic advisor Paul Volcker, who has called for greater restrictions on institutions in the wake of the financial crisis.

"On one hand, you want banks to lend more to help stimulate the economy," Goldman said. "But if this means banks can't trade and are going to make less profit and therefore lend less, that's just more uncertainty."

After the close, American Express (AXP, Fortune 500) reported higher earnings that beat forecasts on flat revenue that also beat estimates. Shares of the financial services firm gained 2% in extended hours trading.

Also after the close, Google (GOOG, Fortune 500) reported a big jump in revenue that topped estimates thanks to a rebound in the advertising market. Shares lost 4% in a "sell the news" reaction.

General Electric (GE, Fortune 500) and McDonald's (MCD, Fortune 500) are due to report Friday.

Declines were broad based, with 28 of 30 Dow stocks sliding, led by IBM (IBM, Fortune 500), Exxon Mobil (XOM, Fortune 500), Chevron (CVX, Fortune 500), Caterpillar (CAT, Fortune 500), Coca-Cola (KO, Fortune 500) and the bank stocks.

Stocks were also vulnerable after the three major indexes ended at more than 15-month highs on Monday.

Results: Goldman Sachs said it earned $8.20 a share in the fourth quarter, trouncing forecasts for a profit of $5.20 per share, thanks to strong gains in its investment unit. Goldman also reported full-year 2009 revenue that doubled from a year ago.

The company also attempted to address criticism of its pay packages one year after accepting government money at the height of the financial crisis. Goldman paid its employees $16.2 billion in salaries and bonuses last year, up almost 50% from 2008, but still less than what had been expected.

Goldman shares fell 4%. Other big bank shares fell, but some of the regional banks were up, keeping the overall sector near unchanged. Fifth Third Bancorp (FITB, Fortune 500), Keycorp (KEY, Fortune 500) and Regions Financial (RF, Fortune 500) all gained.

Starbucks (SBUX, Fortune 500) reported higher quarterly sales and earnings that topped estimates in a report released late Wednesday. The coffee chain's results were driven by growth at stores open a year or more, a retail metric known as same-store sales. Shares gained 2%.

Also late Wednesday, eBay (EBAY, Fortune 500) reported higher quarterly sales and earnings that topped estimates. The Internet retailer also boosted its 2010 earnings forecast.

Economic news: The number of Americans filing new claims for unemployment rose to 482,000 from 446,000 in the prior week. Economists surveyed by Briefing.com thought claims would fall to 440,000.

Continuing claims, a measure of Americans who have been receiving benefits for a week or more, fell to 4,599,000 from 4,617,000 in the previous week. Economists expected 4,598,000 claims, on average.

The Philadelphia Fed, a regional reading on manufacturing, fell to 15.2 in January from 22.5 in December versus forecasts for a drop to 18.

A third report showed that the index of leading economic indicators rose 1.1% in December after rising 1% in the previous month. Economists surveyed by Briefing.com thought it would rise 0.7%.

World markets: Asian markets ended lower, with the exception of the Japanese Nikkei. European markets ended lower.

Commodities and the dollar: The dollar fell versus the euro and the yen, reversing morning gains following Obama's speech.

Commodities were also under pressure because of China's curbs, with China being a big buyer of commodities. Reports Wednesday said China has asked banks to slow the pace of lending this year in an attempt to get ahead of inflation.

COMEX gold for February delivery fell $9.40 to settle at $1,103.20 an ounce. Gold closed at an all-time high of $1,218.30 an ounce last month.

U.S. light crude oil for February delivery slipped $1.66 to settle at $76.08 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices rallied, lowering the yield on the 10-year note to 3.59% from 3.65% late Wednesday. Treasury prices and yields move in opposite directions.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over three to one on volume of 1.5 billion shares. On the Nasdaq, decliners topped advancers by three to one on volume of 2.91 billion shares.