In US economic news, the producer price index rose just 0.2% in April as the government's gauge of gasoline prices fell. A top Federal Reserve policymaker sounded a cautiously upbeat forecast for moderate economic recovery and a gradual waning of price pressures.
Financial stocks fell 2.1% after Oppenheimer analyst warned that the credit crisis was far from over.
The Dow tumbled 199.48 points, or 1.53%, to 12,828.68. The Standard & Poor's 500 index declined 13.23 points, or 0.93%, to 1,413.40, and the Nasdaq composite index fell 23.83 points, or 0.95%, to 2,492.26.