Wall Street skids about 3 percent on recession sign

By Jennifer Coogan

The Dow and S&P 500 had their biggest drops since February 27, 2007. All 30 Dow stocks fell and only 17 of the 500 components on the S&P closed higher.

"This could lead to a further prolonged period of generalized market disruption and a loss of confidence that would not be favorable for any financial institution," the rating agency said.

"The U.S is no longer a manufacturing economy, it's a service economy, so this number will carry a lot more weight" than last week's surprise rise in ISM's manufacturing index, said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois. He added that the ISM report will make investors more nervous about other upcoming indicators.

Year-to-date, the Dow is down 7.5 percent while the S&P is 9 percent lower. The Nasdaq has fared worse, dropping 12.9 percent so far in 2008.

Insurer American International Group Inc was one of the worst Dow performers, falling 4.5 percent to $52.93 on fears about credit exposure.

Oil companies such as Exxon Mobil Corp were under pressure on expectations that an economic downturn will slow transportation and manufacturing, crimping demand for energy.

Technology shares, seen as particularly vulnerable to a downturn in both business and consumer spending, were under pressure.

Verizon shares fell 4.6 percent to $36.83 while stock of rival AT&T Inc dropped 3.8 percent to $36.73 on the NYSE.