Bank lending remained tight as nervous institutions continued to hoard cash. Treasury prices fell, raising their corresponding yields. The dollar gained versus the euro and the yen. Oil, gas and gold prices fell.

The Dow Jones industrial average (INDU) lost 679 points, or 7.3%, closing at its lowest point since May 21, 2003. It was the Dow's third biggest one-day point-loss ever.

The Standard & Poor's 500 (SPX) index lost 7.6% and closed at its lowest point since April 28, 2003. The Nasdaq composite (COMP) lost 5.5% and closed at its lowest point since June 30, 2003.

A key measure of investor fear hit an all-time high: The CBOE Volatility (VIX) index, or the VIX, hit nearly 64.

Over the last seven sessions, the Dow has lost 2,271 points, or 20.1%. Since hitting an all-time high of 14,164.53 one year ago today, the Dow has lost 39.4%.

"We are in a free fall right now and fundamentals have been thrown out the window," said Phil Orlando, chief equity market strategist at Federated Investors.

Stocks have tumbled despite a series of efforts on the part of the government to unfreeze the credit markets and get money flowing through the system again.

On Thursday, the Treasury said it was looking to buy stakes in some banks as part of the $700 billion bank bailout law enacted last week. The main focus of the bailout remains buying bad assets from banks.

The Fed and Treasury have done many things right, but the markets realize that these programs won't have an impact on the market until six to nine months out, Orlando said.

"[Third quarter] earnings will still be poor, [third-quarter] GDP will be a disaster," he said. "Investors are trying to price in the depth of the recession now."

One year ago today, the S&P 500 hit an all-time high of 1565.15. As of Thursday's close, it was down 41.9%.

The Nasdaq has never come close to its record of 5,048.62 hit on March 10, 2000, at the end of the tech bubble. But after hitting a six-year high of 2,859.12 last Halloween, the Nasdaq had slipped 42.5%, as of Thursday's close.

Stocks had slumped throughout the year, but the selling accelerated in September following a series of bank failures and mergers.

"The Lehman bankruptcy was really the failure that triggered this waterfall event we've been going through," said John Merrill, chief investment officer at Tanglewood Wealth Management.

"Suddenly people who thought they had access to money didn't have money and they had to sell something," he said. "So it started with forced selling and it's turned into a panic."

After the close of trade Thursday, Citigroup said it failed to reach a deal with Wachovia. Citi said that although it will seek damages, it won't block a Wachovia (WB, Fortune 500)-Wells Fargo (WFC, Fortune 500) merger.

GE is due to report earnings Friday. In addition, President Bush is expected to make a statement in the morning, telling investors that economic officials are doing everything they can to stabilize our financial system.

Movers: General Motors (GM, Fortune 500) lost 31% Thursday and Ford Motor (F, Fortune 500) fell 21% on reports that auto sales will hit recession levels this year and get worse in '09. In response, S&P put GM and Ford's debt ratings on CreditWatch with a negative outlook. (Full story)

IBM (IBM, Fortune 500)'s better-than-expected earnings had lifted tech stocks in the morning, but even Big Blue got dragged down in the afternoon slump.

Oil services stocks slumped in tune with a slide in oil prices. Chevron (CVX, Fortune 500) lost over 12% and Exxon Mobil (XOM, Fortune 500) lost nearly 12%.

GM, IBM, Chevron and Exxon are all Dow components. All 30 Dow stocks fell. Other big Dow losers included financial components Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

Former Dow component AIG (AIG, Fortune 500) plunged 25% on late Wednesday reports it is taking a Fed loan of up to $37.8 billion. The insurance giant already received an $85 billion Fed loan last month that helped it skirt bankruptcy.

Other financial stocks slumped as well, with Morgan Stanley (MS, Fortune 500) and Merrill Lynch (MER, Fortune 500) both losing 26% after the three-week old short-selling ban was lifted late Wednesday.

In short-selling, traders place bets that a stock will fall. The SEC banned the shorting of nearly 800 financial stocks after critics said it added to the accelerated bloodletting in financial stocks in the summer and early fall.

Credit markets frozen: Amid the ongoing crisis, lending has dried up, making it difficult for businesses to function on a daily basis and for consumers to get loans.

In an effort to get money moving again, the government has taken a number of dramatic steps, including announcing an emergency interest-rate cut Wednesday, coordinated with banks around the world.

Earlier in the week, the Fed said it will buy short-term debt needed to finance daily operations directly from businesses. It also said it will make $300 billion available to banks in return for damaged assets, on top of $300 billion already available. And Congress approved the $700 billion bank bailout plan last Friday.

But despite all these developments, credit markets have barely budged.

"What the Fed has done is eventually going to help turn things around, but people don't believe it yet," said Gary Webb, CEO at Webb Financial Group.. "They're acting on fear."

A Federal Reserve report Thursday showed that the market for commercial paper continued to shrink in the last week. (Full story)

Libor, the overnight bank lending rate, eased to 5.09% Thursday from 5.38% Wednesday, according to Bloomberg.com. However, the levels were still high considering that Libor was at 2.15% a month ago.

Three-month Libor, or what banks charge each other to borrow for three months, rose to 4.75% Thursday from 4.52% Wednesday.

The TED spread, the difference between what banks pay to borrow from each other for three months and what the Treasury pays, spiked to an all-time high of 4.23% Thursday.

The wider the spread, the more reluctant banks are to lend to each other, rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, fell to 0.5% Thursday from 0.64% late Wednesday. Last month, the yield on the 3-month bill skidded to a 68-year low around 0% as panicked investors fled equities, accepting virtually no return on their money rather than risk losing it in the stock market.

Treasury prices slipped, raising the yields. The benchmark 10-year note fell 1-1/32, raising the corresponding yield to 3.76% Thursday from 3.63% late Wednesday. Treasury prices and yields move in opposite directions.

On the economic front, weekly jobless claims edged off a seven-year high, but they still outpaced forecasts. (Full story)

Other markets: U.S. light crude oil for November delivery fell $2.36 to settle at $86.59 a barrel on the New York Mercantile Exchange. Prices slipped on continued bets that the slowing global economy will hurt demand. (Full story)

Oil prices have tumbled on bets of slowing demand since the price of crude hit an all-time high of $147.27 a barrel on July 11.

The price of gas decreased for the 22nd consecutive day, according to a survey of credit card activity by motorist group AAA. (Full story)

COMEX gold for December delivery fell $20 to settle at $886.50 an ounce.

In currency trading, the dollar gained against the euro and the yen.

U.S. stock futures rose early Thursday, indicating a higher open on Wall Street, after the Dow Jones industrial average lost more than 1,000 points in the week's first three days.

In morning trading, Britain's FT-100 index was up 2.7%, France's CAC-40 gained 2.9% and Germany's DAX was 2.5% higher.

Russian markets rallied at the open, after being closed due to severe losses earlier in the week. The benchmark RTS index gained 5.5%.

Asian and Pacific markets were mixed Thursday, with Japan's key index unable to hold early gains, as central banks in the region attempted to stem the global credit crunch with added liquidity and rate cuts.

Tokyo's Nikkei average ended down 45.83, or 0.5%, to a new 5-year low of 9,157.45, giving back gains of more than 2.5% in afternoon trading.

The reversal came after a key Japanese indicator, core private sector machinery orders, was reported at the lowest level in 5 years in August.

Prime Minister Taro Aso called for more action to bolster the country's faltering economy. The policy chief of Aso's Liberal Democratic Party said the prime minister wants ruling coalition leaders to consider a new emergency package beyond the $18 billion economic stimulus plan proposed in late August

The loss followed Wednesday's 9.4% drubbing, the third largest single-day drop ever, and came despite the Bank of Japan's injection of ¥2 trillion ($20 billion) into money markets.

Hong Kong's Hang Seng index finished up 3.3%, recovering from Wednesday's 8% plunge, after the Hong Kong Monetary Authority cut interest rates for the second straight day.

South Korea's KOSPI ended up 0.6%, although that was off its highs of the day. Its central bank followed the lead taken by the Federal Reserve and other central banks around the world a day earlier, slashing its key interest rate by a quarter percent, the Yonhap news agency reported.

Taipei's Weighted index ended down 1.5% despite a central bank rate cut. China's Shanghai Composite Index lost 0.8%. Australia's ASX-100 index finished down 1.5%.

Global markets snapped back strongly for a time on Wednesday after central banks around the world - including the Federal Reserve - joined together to cut interest rates and increase liquidity in an effort to address market concerns.

The positive effect was short-lived, however, as all major European markets and Wall Street closed the day lower. European markets closed the day down anywhere from 5% to 9%. The Dow Jones industrial average fell 190 points, or 2%.

On Thursday, Iceland's banking system took another hit as the Icelandic Financial Supervisory Authority nationalized a third bank in as many days, taking control of Kaupthing. The move means the bank will continue operating and all domestic deposits will be fully guaranteed, the authority said.

Two other banks, Landsbanki and Glitnir, were also taken into receivership this week.

-- The Associated Press contributed to this report. 

Credit markets remained tight following news of the Fed's action, with banks continuing to hoard cash. Treasury bond prices tumbled, pushing the corresponding yields higher.

After the close of trade, the Fed said it will give AIG (AIG, Fortune 500) a loan of up to $37.8 billion on top of the $85 billion it gave it last month to help the insurance giant avoid bankruptcy.

The Dow Jones industrial average (INDU) fell 190 points, or 2%, with bank stocks and Alcoa leading the retreat. The Standard & Poor's 500 (SPX) index fell 1.1% and the Nasdaq composite (COMP) lost 0.8%.

The major gauges seesawed throughout the session, with the Dow down as much as 252 points and up as much as 180.

"The volatility is just ridiculous these days," said John Forelli, portfolio manager at Independence Investments. "The market reaction to these developments can change hour-to-hour."

Investors welcomed the Fed's emergency rate cut, coordinated with central banks around the world, but remained gloomy about the outlook for the economy.

Forelli said that people are aware that the economy is getting weaker in the near-term, and that the Fed and the Treasury are going to do whatever they can to help calm financial markets. But that's not enough of a reason for investors to jump back into stocks, he said.

The rate cut was the latest step taken by various government agencies over the past week in an attempt to get banks to start lending to each other again. The Dow has lost nearly 1,600 points in the past week and the three major stock gauges have fallen to five-year lows as panicked investors have fled stocks.

"The stock market is catching up with credit markets and the credit markets are indicating major problems out there," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.

The Fed cuts rates: The central bank, in coordination with banks around the world, said Wednesday that it is cutting the fed funds rate by half a percentage point to 1.5%. The fed funds rate is a key short-term lending rate that impacts loans on credit cards, home equity lines and business loans. The Fed also cut the discount rate, a bank lending rate, by half a percentage point. (Full story)

Wall Street had been expecting the Fed to do just what it did so there was no surprise factor, said Shapiro.

The cut follows several dramatic moves on the part of the Fed to loosen up credit markets, which businesses depend on to function day-to-day. The absence of ready capital has hurt the broad financial system and consumers who can't get loans.

On Tuesday, the Fed said it will buy directly from businesses short-term debt that companies use to finance daily operations. On Monday, it said it will make $300 billion available to banks in return for damaged assets, on top of $300 billion already available. And Congress approved the $700 billion bank bailout plan last Friday, allowing the Treasury to buy bad debt directly from banks.

But despite all these developments, the stock market has remained under pressure.

"Equity markets are saying that any beneficial effect from these programs is down the road and the next six months are going to be terrible," Shapiro said.

Speaking in the afternoon, Treasury Secretary Henry Paulson said that while markets are still strained, the government will use all of its resources to ensure stability in the financial system. (Full story)

(Here's what else the Fed can try)

Credit markets: Several measures of bank jitters remained high. (Full story)

The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, slipped to 0.63% from 0.69% late Tuesday, indicating investors are willing to take a very small return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

The TED spread, which is the difference between what banks pay to borrow from each other for 3 months and what the Treasury pays, rallied to an all-time high of 4.02 percentage points before retreating to 3.89.

The wider the spread, the more reluctant banks are to lend to each other, rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

Libor, the overnight bank lending rate, spiked to 5.38% from 3.94% the previous day. However, the rate was set ahead of the Fed rate cut.

The Libor-OIS spread, a measure of cash scarcity, rose to a record 3.22% from the record 2.97% reached Tuesday. The spread shows how much cash is available for banks to lend and is used by them to set lending rates.

Treasury prices tumbled, erasing early gains and lowering the yields. The benchmark 10-year note fell 1-9/32, raising the corresponding yield to 3.65% from 3.50% late Tuesday. Treasury prices and yields move in opposite directions.

Company news: Financial stocks slumped in the last hour of the session, erasing afternoon gains and dragging down the broader market.

Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and Merrill Lynch (MER, Fortune 500) all gave up gains, turning lower.

Citigroup and Wells Fargo (WFC, Fortune 500) agreed on Wednesday to extend the legal standstill in their battle for control of Wachovia.

Bank of America (BAC, Fortune 500) gave up an afternoon recovery attempt sparked by news that it will buy back as much as $4.7 billion in auction-rate securities to settle fraud charges.

The stock lost 26% Tuesday after the company reported weaker profits that missed estimates, cut its dividend and said it will need to set aside money for bad loans through the next year.

Late Tuesday, Alcoa (AA, Fortune 500) reported weaker quarterly sales and earnings that missed estimates, due to sluggish aluminum prices and demand. The Dow component also suspended its share repurchase program. Shares fell 12%.

Market breadth remained negative. On the New York Stock Exchange, decliners topped advancers almost 2 to 1 on volume of 1.45 billion shares. On the Nasdaq, losers beat winners four to three on volume of 2.73 billion shares.

Retail sales: Consumers bought essentials at discount prices in September, and not a whole lot else, according to the latest monthly sales reports from the nation's chain stores.

Wal-Mart Stores (WMT, Fortune 500) said same-store sales gained 2.4%, at the low end of its forecast. Same-store sales is a retail metric that refers to stores open a year or more. Costco (COST, Fortune 500)'s same-store sales rose 7%.

Department stores and luxury retailers were hit hard, with J.C. Penney (JCP, Fortune 500)'s sales down 12% and Nordstrom (JWN, Fortune 500) sales off 9.6%. (Full story).

Also in the mix on Wednesday: a surprise rise in the August pending home sales index, as companies bought up repossessed homes on the cheap.

Global markets: Markets overseas tumbled again Wednesday, with Japan seeing one of its worst days ever as the Nikkei slumped 9%. European markets slid as well, despite the coordinated central bank actions. (Full story)

Oil and gold: U.S. light crude oil for November delivery fell $1.11 to settle at $88.95 a barrel on the New York Mercantile Exchange on continued bets that the slowing global economy will hurt demand. (Full story)

Oil prices have tumbled on bets of slowing demand since the price of crude hit an all-time high of $147.27 a barrel on July 11.

COMEX gold for December delivery rallied $24.50 to $906.50 an ounce.

Other markets: In currency trading, the dollar slipped against the euro and the yen. (Full story).

The price of gas decreased for the 21st consecutive day, according to a survey of credit card activity by motorist group AAA.