Stocks tumbled Thursday after the bailout of a large, troubled investment fund sent a chill down the corridors of Wall Street and left investors wondering who might be the next victim of the global economic turmoil.
"That was a wake-up call, unfortunately," said Arthur Hogan, chief market analyst at Jefferies & Co. "It took some of the euphoria [over lower interest rates] out of the market."
The Dow Jones industrial average, off as much as 200 points late in the day, closed down 152.42 points, or 1.9%, at 8,001.99.
That erased much of Wednesday's 257-point, or 3.3%, rally after Federal Reserve Board Chairman Alan Greenspan hinted that the central bank will cut rates soon to reduce pressure on the strained world financial system.
Hogan said investors also were unnerved by news that the House Judiciary Committee will vote on Oct. 5 or 6 on whether to launch a formal impeachment inquiry based on independent counsel Kenneth Starr's report on President Clinton's affair with a former White House intern.
In the broad market declining issues led advances by a 2-1 margin on the New York Stock Exchange, in active trading of 806 million shares.
The Nasdaq composite fell 1.7% after jumping 3.7% Wednesday.
Despite strong overnight gains in Asian and European stock markets following Wall Street's rally on Wednesday, U.S. stocks fell early on as investors digested details of the $3.5-billion bailout of hedge fund Long-Term Capital Management.
The fund was nearly wiped out by wrong-way bets on global bonds and other investments as markets have gyrated wildly in recent months.
"This is not the last big player to get into trouble," said Hugh Johnson, chief investment officer at brokerage First Albany.
"This is the kind of thing the market has been worried about--fallout from the emerging-market crisis," said Peter Coolidge, senior equity trader at Brean Murray.
Latin American stocks, which soared on Wednesday, pulled back sharply on Thursday. The Mexican market dove 5.4% after rising 9.1% Wednesday. Brazil's market lost 6% after an 11% rise.
In the bond market shorter-term yields continued to sink, anticipating that Long-Term Capital's crisis makes it even more likely that the Fed will cut its benchmark short-term rate from 5.5% now to 5.25% or even 5% on Tuesday, when the Fed board meets.
The 3-month Treasury bill rate fell to 4.47% from 4.56% Wednesday. The five-year T-note yield slid to 4.43% from 4.47%.
But longer-term yields were unchanged. The 30-year T-bond ended at 5.16%, same as on Wednesday.
"What we're seeing in the market is an almost textbook reaction," with shorter-term yields, the most sensitive to Fed cuts, benefiting the most, said Alan Koepplin, who helps manage $2 billion in bonds at SG Cowen Asset Management.
One U.S. bank, Southwest Bank of St. Louis, cut its prime lending rate to 8% from 8.5%.
In currency trading the dollar fell against European currencies and against the yen on news of Long-Term Capital's problems.
For the stock market, many analysts warn that concerns about the health of the financial system and the economy won't quickly dissipate even if the Fed cuts rates.
Among Thursday's highlights:
* Financial stocks suffered another hit after the news about Long-Term Capital. Merrill Lynch sank $4.25 to $53.75, Citicorp dove $5.63 to $99.88, J.P. Morgan lost $6.13 to $87 and Lehman Bros. fell $4.19 to $33.69.
* Retailers also were weak, possibly because of worries about an economic slowdown. Wal-Mart lost $1.69 to $62.81, Gap dropped $3.81 to $54 and Dayton Hudson slid $2.75 to $36.50.
Selling also hit airlines, with Continental losing $1.75 to $38.50 and Delta down $3.44 to $103.31.
* In the tech sector Internet-related stocks were mixed. Yahoo lost $2.63 to $115.25 after trading as high as $125.38. But Lycos inched up 38 cents to $33.63 and Excite gained $1.38 to $39.13. All three firms are Internet directory or search vehicles.
* Oil stocks were broadly lower after surging on Wednesday. Mobil fell $2.56 to $76.69.
* Bergen Brunswig Corp. rose $1.25 $50.50 as the No. 3 U.S. drug wholesaler declared a 2-for-1 stock split, payable Dec. 1.
Market Roundup, D7