By Kristina Cooke
NEW YORK (Reuters) - Stocks tumbled for a fifth straight session on Tuesday, capping the Dow's biggest five-day point loss ever, as fears mounted that the spiraling credit crisis would drag the economy into a deep recession.
Federal Reserve Chairman Ben Bernanke did little to reassure markets when he cautioned that downside risks to economic growth have worsened, though he did signal a readiness to lower interest rates. An earlier move by the Federal Reserve to unclog the commercial paper market, which companies use to fund their day-to-day operations, gave the stock market only a fleeting boost.
The financial sector was the biggest drag on the market, with the S&P financial sub-index dropping to its lowest level in more than a decade.
Bank of America skidded 26.2 percent the day after it said it would cut its dividend and raise $10 billion to help staunch rising loan losses.
"The market can't seem to find a footing, no matter what the government or the Fed tells them. We're in uncharted territory and we don't know how that is going to end," said Linda Duessel, market strategist at Federated Investors in Pittsburgh.
"We've all been shellshocked by the momentum on the downside in this market, and now people are talking about a long and deep recession -- just a month ago, many thought a recession could be averted."
The Dow Jones industrial average fell 508.39 points, or 5.11 percent, to 9,447.11. The blue-chip Dow average has lost more than 1,400 points over the past five sessions, or nearly 13 percent of its value, according to Reuters data.
The Standard & Poor's 500 Index dropped 60.66 points, or 5.74 percent, to 996.23 -- the first time the benchmark index has closed below the 1,000 level in more than five years. The drop was the S&P 500's biggest five-day percentage decline since the 1987 crash.
The Nasdaq Composite Index slid 108.08 points, or 5.80 percent, to 1,754.88.
The losses came a day after a steep global equity market sell-off and traders said there was some disappointment that central banks had not orchestrated a coordinated interest-rate cut to calm financial markets.
The U.S. Federal Reserve stepped forward as a commercial lender of last resort as governments around the world scrambled to stem the global financial crisis and calls arose for concerted action. The Fed created a new commercial paper facility that would buy short-term, highly rated debt, stepping into the corporate debt market in a program that falls outside the $700 billion rescue plan approved by the U.S. Congress on Friday.
Morgan Stanley shares fell as much as 40 percent, before rebounding to close down 24.9 percent at $17.65, after a company spokesman said its deal to sell up to 24.9 percent of its voting shares to Japanese bank Mitsubishi UFJ Financial Group was on track to close "imminently".
The drop in financials came on the eve of the lifting of the ban on short selling in a raft of financial companies or companies with financial exposure. Short sellers borrow stocks and sell them on the bet that the stocks will fall in value, so that they can buy them back at a lower price and pocket the difference.
The price of U.S. front-month crude oil rose $2.25, or 2.6 percent, to settle at $90.06 a barrel, fueling concerns about consumer and business spending. An index of airline stocks fell 15.6 percent.
Trading volume was low on the New York Stock Exchange, with about 1.73 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.82 billion shares traded, above last year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones by 7 to 1 on the NYSE and on the Nasdaq, by about 6 to 1.
(Editing by Jan Paschal)