The Dow Jones industrial average lost 115.64 points to close at 10,456.91. Greenspan's remarks, combined with a spike in crude oil future prices, also undermined the Nasdaq, S&P 500 and other major financial indexes.
The Fed chairman's comments also reverberated in currency and bond markets, with the U.S. dollar sinking against the euro.
Speaking at a European banking conference in Frankfurt, Germany, Greenspan said that the U.S. ballooning trade deficit (the difference between exports and imports) has so far had little significant impact on the nation's economy. The deficit in the current account — a broader measure that includes trade and foreign investment flows — swelled to a record high $166.18 billion in the second quarter.
But the central banker said that unless the trade deficit is eventually whittled down, the nation faces the prospect of higher interest rates and a weaker dollar.
"Current account imbalances, per se, need not be a problem, but cumulative deficits, which result in a marked decline of a country's net international investment position — as is occurring in the United States — raise more complex issues," Greenspan said in prepared comments.
The U.S. dollar dropped last week to a record low against the 5-year-old euro, a 12-year low against the Canadian dollar and a nine-year low against an index of major currencies as traders worried about the nation's growing trade and budget deficit.
While a cheaper dollar makes U.S. goods more affordable in overseas markets, it also reduces the value of American securities, making them less attractive to foreign investors. That could eventually lead foreign investors to demand higher interest rates or to stop buying and start selling U.S. securities. Foreign countries own about $1.3 trillion in U.S. bonds and securities.
Greenspan today echoed comments by other economists that the most effective way to narrow the trade and account gap was to reduce the massive U.S. budget deficit. That would curb the need for Uncle Sam to issue so many Treasury notes. And the dollar would rise on its own, because the deficit is the main reason it continues to fall.
The growing trade gap was a topic of concern at September's meeting of Fed policymakers, according to meeting minutes. Policymakers noted that weak demand on the part of several U.S. trading partners and other factors "was contributing to a worrisome further widening of the U.S. trade and current account balances."
In addition to Greenspan's comments, investors were also rattled by testimony on Capitol Hill that raised concern about the safety of some popular drugs in addition to Vioxx.
The stocks of companies whose drugs were mentioned at the Thursday hearing suffered today, including: Abbott Laboratories, maker of the anti-obesity drug Meridia, down 1.43%; AstraZeneca, maker of the cholesterol-lowering drug Crestor lost 2.26%; Roche Holdings, maker of acne medicine Accutane, fell 1.7%; Pfizer, maker of painkiller Bextra, dropped 1.73%; and GlaxoSmithKline, maker of respiratory medication Serevent, slid 1.88%.
Merck & Co., which makes Vioxx and is a component of the Dow, fell 0.88%.
Times staff writer David Streitfeld contributed to this report.