Increased instability in the Middle East drove up the CBOE Volatility Index .VIX, the stock market's fear gauge, as investors scrambled for protective positions.
"The market hates uncertainties, especially geopolitical ones, and based on how that shapes up throughout the weekend (in Egypt), next week's trading will be impacted," said Thomas Nyheim, portfolio manager for Christiana Bank & Trust Co in Greenville, Delaware.
Trading volume was the highest of the year at 9.97 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared to last year's estimated daily average of 8.47 billion shares.
The market drop ended the Dow's eight-week winning streak and pushed the S&P 500 below its 14-day moving average for the first time in two months. Disappointing results from Amazon.com (AMZN.O) and Ford (F.N) further added to the gloom.
Developments in the Middle East could be a trigger for investors to sell at a time when many expected a correction after a market rally of about 18 percent since September.
"I think the next two to three weeks, the crisis in Egypt and potentially across the Middle East, might be an excuse for a big selloff of 5 to 10 percent," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati, Ohio.
Nasdaq quotations for its main stock indexes suffered an outage of nearly one hour at the open, causing confusion among traders. Nasdaq OMX Group (NDAQ.O) blamed a glitch with its global index data service.
The Dow Jones industrial average .DJI ended down 166.13 points, or 1.39 percent, at 11,823.70. The Standard & Poor's 500 Index .SPX was down 23.20 points, or 1.79 percent, at 1,276.34. The Nasdaq Composite Index .IXIC fell 68.39 points, or 2.48 percent, at 2,686.89.
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