(Reuters) - Stocks fell more than 2 percent on Thursday, extending the previous day's sharp decline as investors fretted over the Federal Reserve's plan to begin reducing its stimulus later this year if the economy strengthens.
The S&P 500 recorded its biggest daily decline since November 11, 2011, on the year's heaviest day of trading. All 10 S&P sectors were sharply lower, with 94 percent of stocks traded on the New York Stock Exchange down for the day and more than four-fifths of Nasdaq-listed shares ending lower.
The Dow Jones industrial average dived 353.87 points, or 2.34 percent, at 14,758.32. The Standard & Poor's 500 Index was down 40.74 points, or 2.50 percent, at 1,588.19. The Nasdaq Composite Index dropped 78.57 points, or 2.28 percent, at 3,364.64.
The Fed's program of bond-buying has fueled stock market gains this year, sending indexes to a series of all-time highs. A trend emerged of investors buying on market dips and limiting stocks' decline.
David Joy, chief market strategist at Ameriprise Financial in Boston, said it wasn't clear that pattern would continue.
"There's money leaving the market from people who were convinced that the rally has been mostly attributable to the Fed, and the rise on the 10-year yield is a concern since it happened so quickly," he said. "It's too early to say whether this represents a buying opportunity or if the weakness will continue."
The S&P 500 index closed below its 50-day moving average for only its second time this year. An extended break below that level, a key technical measure of the recent trend in stocks, could add to selling pressure. It also closed under 1,600 for the first time since May 2.
About 9.29 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, above the daily average so far this year of about 6.36 billion shares.
Bernanke on Wednesday said the central bank's policy of buying $85 billion in bonds per month could start to wind down this year if the economy is strong enough and could finish in mid-2014.
"Remember that tapering would be a vote of confidence in the market, which would be good news," said Joy, who helps oversee $708 billion in assets. "And for the moment, the Fed is still very accommodative, with things remaining data-dependent. Those are signs that declines of this magnitude may not be justified."
Also adding to the market's concerns, China's interbank funding costs surged as the government ignored market pressure to inject funds into the market despite more evidence China's economy is slowing. Chinese stocks dropped 2.8 percent.
Among the U.S. sectors hit hard on Thursday were homebuilders, down 6.7 percent on concerns of higher borrowing rates. Data on Thursday showed sales of existing U.S. homes rose in May rose to a 3 1/2-year high.
Builder PulteGroup Inc fell 9.1 percent to $18.87 as the biggest decliner on the S&P 500, followed by D.R. Horton Inc, down 9 percent to $21.31.
The benchmark 10-year U.S. Treasury note fell 15/32, with the yield at 2.408 percent.
The S&P has fallen about 4 percent from its all-time closing high on May 21 of 1,669.16. Other markets around the world have also have fallen dramatically, with the MSCI's all-country world markets index dropping 3.7 percent, its largest single-day drop in 19 months.
Each of the 10 S&P industry sectors fell more than 1 percent with consumer staples leading the losses with a 3 percent drop. Kroger fell 6.1 percent to $32.98 after the company said its sales growth missed expectations in the first quarter.
Energy shares were also sharply weaker, dropping alongside a 2.9 percent slump in the price of crude oil.
Walt Disney shares fell 3.7 percent to $61.98 after Goldman Sachs removed the stock from its "conviction buy" list.
Shares of Ebix Inc lost 44 percent to $11 a day after the insurance software provider said that it and an affiliate of Goldman Sachs would cancel their planned merger.
Oracle Corp fell in extended trading after the company reported an increase in new software sales that was at the low end of its own forecasts.
On the upside, GameStop Corp jumped 6.3 percent to $40.94 a day after Microsoft Corp said users of its forthcoming Xbox One game console will be able to lend or sell used disc-based games, a plus for GameStop's used games business.
Jabil Circuit Inc rose 1.5 percent to $20.12 a day after announcing an unspecified number of job cuts as part of a restructuring plan.
(Editing by Nick Zieminski and Kenneth Barry)