Stocks slid as Federal Reserve Chairman Ben Bernanke's comments added to worries about the economic impact of the U.S. "fiscal cliff" and Hewlett-Packard's stock sank on news of an $8.8 billion accounting charge.
Bernanke, in comments before the Economic Club of New York, said the Fed does not have the tools to offset the damage that would result if politicians fail to strike a deal to prevent going off the fiscal cliff. If a solution isn't approved in time, then mandatory tax increases and spending cuts will go into effect early next year. Bernanke said he does not believe the possible benefits of cutting the interest it pays on bank reserves are sufficient to outweigh the risk of trouble in money markets.
"In the short run, we're hostage to the fiscal cliff. I think (Bernanke's) got to be really, really fearful that Washington doesn't get its act together and that creates stresses on the financial system," said Dan Veru, chief investment officer of Palisade Capital Management in Fort Lee, New Jersey.
Stocks rallied for the last two sessions on optimism that Washington politicians could agree on a deal to avoid the U.S. fiscal cliff. But the gains followed two weeks of sharp losses.
Hewlett-Packard Co shares sank 12 percent to a 10-year low at $11.70 as the computer and printer maker swung to a fourth-quarter loss. The company said it took an $8.8 billion charge related to its acquisition of software firm Autonomy, citing "serious accounting improprieties.
The Dow Jones industrial average <.DJI> was down 63.43 points, or 0.50 percent, at 12,732.53. The Standard & Poor's 500 Index <.SPX> was down 5.78 points, or 0.42 percent, at 1,381.11. The Nasdaq Composite Index <.IXIC> was down 15.01 points, or 0.51 percent, at 2,901.06.
Another factor weighing on stocks was Moody's Investors Service's reduction of France's sovereign rating by one notch to Aa1 after the market's close on Monday. Moody's cited an uncertain fiscal outlook as a result of the weakening economy.
(Additional reporting by Chuck Mikolajczak Editing by Jan Paschal)