The broad market Standard & Poor’s 500 Index and the Dow both fell more than 2 percent. Bank of America, Citigroup and JPMorgan Chase were the biggest drag on the S&P 500, and they were among the top drags on the Dow.

In Europe, German business sentiment suffered its biggest drop since the September 11, 2001 attacks on New York and Washington, British retail sales took a record fall and surveys of German, French and Italian businesses all came in below market expectations.

Bleak data also arrived as Daimler and Renault cut their annual forecasts, hammering automakers and helping push European shares lower. The euro hit a two-week low against the dollar as the increasingly gloomy outlook cooled any expectations the European Central Bank would raise interest rates.

U.S. Financial companies, which have incurred huge losses from the housing slump, slid after data from the National Association of Realtors.

Shares of mortgage finance companies Fannie Mae and Freddie Mac fell more than 17 percent, just a day after the House approved a housing rescue package that would include a U.S. government lifeline for the two companies.

S&P financial stocks fell 6.7 percent, its biggest single-day decline since April 2000.

Steve Goldman, market strategist at Weeden & Co based in Greenwich, Connecticut, said investors remain skittish despite passage of the bill and the government’s rescue efforts.

"Fannie and Freddie are probably in need of a capital infusion and that fear is not going away. The housing data provided a catalyst today," Goldman said.

Post-earnings brokerage downgrades of Boeing , down 6.5 percent, McDonald’s , off 1.3 percent and AT&T , off 3.5 percent, added to the economic headwinds.

Ford slid more than 10 percent and Dow Chemical fell 1.8 percent.

"It all gives one every reason to test what’s been a violent and surprising rally over the last few days," said Jim Awad, chairman of W.P. Stewart Asset Management in New York.

"The big question is whether or not it was a fantasy rally," he added. "Smart people will tell you there’s enough work to be done in the financial sector and enough after effects from $4 gasoline to suggest we will go down again."

The Dow Jones industrial average fell 283.10 points, or 2.43 percent, at 11,349.28. The Standard & Poor’s 500 Index fell 29.62 points, or 2.31 percent, at 1,252.57. The Nasdaq Composite Index fell 45.77 points, or 1.97 percent, at 2,280.11.

"Weakness in the U.S. economy is rapidly spreading around the globe," said William O’Donnell, head of U.S. interest rate strategy at UBS Securities in Stamford, Connecticut.

European stocks gave up most of the previous day’s gains as the lowered forecasts from Daimler and Renault hit autos and weakening commodity prices dragged oils and miners lower.

Daimler sank 10 percent, Fiat lost 4.9 percent and Peugeot fell 7.2 percent.

The FTSEurofirst 300 index of top European shares closed down 1.6 percent lower at 1,170.80 points. The index rose 2.1 percent on Wednesday.

U.S. Treasury debt extended gains while rate futures trimmed chances of a September interest rate hike from the Federal Reserve after the U.S. existing home sales in June.

Euro zone government bonds rallied, snapping a six-day losing streak triggered by falling oil and rising stock prices, on the disappointing economic reports.

The benchmark 10-year U.S. Treasury note gained 26/32 to yield 4.02 percent. The 30-year U.S. Treasury bond rose 28/32 to yield 4.62 percent.

The dollar rose slightly against major currencies, with the U.S. Dollar Index up 0.02 percent at 72.808. Against the yen, the dollar fell 0.69 percent at 107.21.

The euro fell 0.03 percent at $1.5683.

Japan’s Nikkei share average rose 2.2 percent to its highest close in almost a month.

Shares in the Asia-Pacific region excluding Japan edged up 0.8 percent to the highest level in more than three weeks. The MSCI index has bounced 8 percent from a 16-month low plumbed last week.

Oil prices rebounded in technical trading after recent declines left the market oversold.

U.S. light crude settled at $125.49 a barrel, up $1.05. London Brent crude settled at $126.44, up $1.15, after falling to a seven-week low of $124.10 earlier.

U.S. gold futures seesawed but ended a tad lower as a strong dollar and losses in holdings of gold exchange-traded funds offset bargain hunting and oil’s gains.

Gold contracts for August settled down 50 cents at $922.30 an ounce in New York.

(Reporting by Steven C. Johnson, Ellis Mnyandu, Chris Reese in New York; Jamie McGeever, Kirsten Donovan, Ikuko Kao and Peter Graff in London and Blaise Robinson in Paris)

(Reporting by Herbert Lash. Editing by Richard Satran)