Sell-off sends Dow below 12,000

A trader on the floor of the New York Stock Exchange appears contemplative yesterday. (Spencer Platt/Getty Images)

NEW YORK - A market that had been looking for direction in recent weeks seems to have found one: down.

The Dow Jones industrial average tumbled 220.40 points, or 1.83 percent, yesterday - closing below 12,000 for the first time since March - in a sell-off that left shares of financial firms battered - and the index staggering toward its low for the year.

The decline capped a dreary week that forced investors to acknowledge that the resolution of the Bear Stearns collapse did not solve the problems facing the economy. With oil prices in record territory, worries about inflation have roared back into the picture, even as analysts suggested the recession may be lighter and shorter than previously feared. Investors are left looking for clues about where the bottom is going to be.

The Standard & Poor's 500 stock index lost 1.85 percent, or 24.90 points, yesterday and finished down 3.1 percent for the week. At 1,317.93, the S&P is just 3.5 percent above its low for the year - and down 15.8 percent from its all-time high in October.

The Dow Jones industrial average, which closed at 11,842.69, has followed a similar trajectory. It is less than a percentage point above its low for the year, 11,740.15, set on March 10 just before the sale of Bear Stearns to JPMorgan Chase. The Dow fell 3.8 percent this week.

The Nasdaq composite index slipped 55.97 points, or 2.27 percent, to 2,406.09, down 2 percent for the week.

The day's trading was particularly volatile because of quadruple witching, the quarterly expiration of options and futures contracts.

Contributing to the anxiety of investors, analysts said, has been a somewhat mixed message sent by the Federal Reserve. Fed officials delivered several speeches last week that suggested the bank had shifted its focus to fighting inflation, an implication that interest rates could rise by the end of the year.

Yields in the bond market, which offer a gauge of the expectations of investors for rates, moved sharply upward on the remarks, while the stock market gyrated.

The Fed appeared to back off its hawkish talk earlier this week. It is nearly impossible to determine the motivations of central bankers, but many analysts saw the retrenchment as an attempt to tamp down expectations of a rate increase.

All the back-and-forth resulted in jitters across the investment landscape. The S&P 500 has made its way down in a series of bumps; the Dow followed a similarly staggered path.

The rise in oil prices has only added to the anxiety: Crude oil for July delivery settled up $2.69, to $134.62 a barrel.

Investors are hoping to glean some answers after the Fed's meeting next week. Central bankers are expected to hold benchmark interest rates steady at the meeting, which ends Wednesday. But their policy statement will be picked over by analysts seeking some guidance on whether high inflation, or a recession, poses the greater risk to the economy in the months ahead.