Economic jitters sink Wall Street

NEW YORK (Reuters) - Stocks plunged on Thursday on strains in the credit markets, caution about the fate of the $700 billion financial rescue bill and bleak economic reports.

The reports on unemployment claims and factory orders painted a worrying picture, which could spell tough times for corporate profits. The number of people filing for new jobless benefit claims rose to a seven-year high in the latest week and factory orders showed a steeper-than-expected drop in August.

Wall Street fretted over the specter of deterioration in the underlying economy and the prospects the financial-sector bailout legislation, which the Senate passed on Wednesday night but the House rejected in its original form. A second House vote is expected on Friday.

Investors pummeled shares of economic bellwethers, including Caterpillar Inc , the maker of heavy equipment, whose stock tumbled more than 5 percent.

Shares of General Electric slid more than 9 percent after the diversified manufacturer announced that it had priced a share offering to raise cash below Wednesday's closing stock price.

Technology shares weren't spared. Shares of tech services giant International Business Machines Corp fell more than 4 percent.

The weak data is "all an indication of how much damage this lack of activity in credit markets over the last year has done to the U.S. and global economy," said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.

The Dow Jones industrial average slid 208.20 points, or 1.92 percent, to 10,622.87. The Standard & Poor's 500 Index dropped 26.68 points, or 2.30 percent, to 1,134.38. The Nasdaq Composite Index shed 51.92 points, or 2.51 percent, to 2,017.48.

"None of this is positive for the U.S. consumer, either. It's almost a perfect storm and it's starting to hit home," Lancz said.

The Senate passed the bailout two days after the House rejected an initial plan that triggered the biggest slide in U.S. stocks in more than two decades.

But despite the bill's success in the Senate, credit market constraints persisted on Thursday. The commercial paper market -- short-term loans -- contracted for the third straight week, as business lending and borrowing effectively shut down

In the latest sign of faltering consumer and business spending, hotel operator Marriott International Inc warned that 2009 would be tough, sending its shares down 3.4 percent to $24.23 on the New York Stock Exchange.

On Nasdaq shares of eBay Inc tumbled nearly 7 percent to $19.46 after Morgan Stanley cut its price target on the stock of Internet auctioneer and retailer.

Shares of commodity-related companies fell, with miner Freeport McMoRan Copper & Gold Inc falling 8.2 percent at $48.63, after Goldman Sachs removed the stock from its buy list.

Shares of North American fertilizer companies tumbled after Merrill Lynch chopped its ratings on the sector, citing an uncertain near-term earnings outlook. Potash Corp slid 22.6 percent to $98.99.

U.S. President George W. Bush, speaking after the 74-25 Senate vote, called the bailout "essential to the financial security of every American." However, some on Wall Street were skeptical about the bill's chances after Monday's surprise loss in the House.

"If this bill doesn't pass in the House, it's game over. The House tomorrow has an opportunity to potentially stave off a complete economic collapse," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

(Additional reporting by Steven C Johnson; Editing by Kenneth Barry )