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Concerns over the deteriorating condition of Japan's stricken nuclear reactors, and the effect on global economies, sparked the Dow's biggest selloff since August and left the S&P 500 in the red for 2011.
After Wednesday's declines, the Nasdaq and the S&P 500 are at their lowest levels since December 2010.
The nuclear crisis in Japan continued escalating Wednesday, after a fire broke out at one of Japan's distressed nuclear plants, increasing core temperatures and causing a "partial meltdown," according to U.S. Energy Secretary Steven Chu.
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“The events unfolding in Japan actually appear to be more serious than Three Mile Island," widely considered the worst U.S. nuclear accident, Chu said in a speech to lawmakers.
Fears that radiation could drift through the air prompted the U.S. government to urge citizens in a 50 mile radius of the Fukushima plant to evacuate or seek shelter inside.
Japan's Nikkei 225 average, the Japanese equivalent of the Dow, surged 5.7% Wednesday, following the worst two-day rout in 24 years. The rally was led by short covering, which is when traders buy shares to end a short-position, according to analysts. However, Nikkei futures plunged 5.2% in morning trading in Japan after the EU Energy Chief said the condition at one nuclear site was "effectively out of control."
Despite steep losses, and calls to halt trading in Japan, the Tokyo Stock Exchange plans on opening Thursday at 8:00 p.m. ET, according to Reuters, which cited a report by Japan's Nikkei newspaper.
Trading in the U.S. was particularly volatile, with the Dow making 100 points moves in either direction mere minutes. The VIX, commonly seen as a gauge of fear in stock markets, surged 19% to its highest level since August. The New York Federal Reserve had to restart its asset-buying program due to the extreme volatility, sources told the FOX Business Network.
"The more news that gets leaked out of Japan, the more dire the situation appears," said Peter Kenny, managing director at Knight Capital Group. "It’s having a really chilling effect on the market."
Traders also eyed oil prices, which jumped on concerns about the escalating situation in Bahrain. Security forces in the oil-producing country clashed with protesters, resulting in deaths and injuries, according to media reports.
Markets shrugged off a bearish report from the Energy Department, saying U.S. oil inventories jumped to 1.75 million barrels, greatly exceeding the forecast of 1.3 million. Stocks in Cushing, Oklahoma, a key U.S. shipping point, fell 243000 barrels, but remained near record highs.
Light, sweet crude settled higher by 80 cents, or 0.82%, to $97.98 a barrel, after tumbling 4% Tuesday. The average price for a gallon of regular at the pump nationwide was $3.55, up from $3.13 last month and $2.79 last year.
On the economic front, markets received disappointing data showing new housing starts sinking 22.5% in February, the fastest decline since 1984. Companies involved in residential construction, like Toll Brothers (TOL) and PulteGroup (PHM), could be affected be these data.
"This was an awful report, perhaps the worst housing starts report ever," wrote Patrick Newport, an economist at IHS Global Insight, in a research note.
A report from the Labor Department showed prices producers paid for goods jumping 1.6% in February, more than the 0.7% increase economists were expecting. Core prices, which exclude volatile food and energy prices, were up 0.2%, inline with economists' expectations.
Market participants are paying particularly close attention to price levels, since the Federal Reserve has embarked on a very accommodative monetary policy regime, keeping short-term interest rates near 0% and purchasing trillions of dollars in long-term treasuries, in a bid to accelerate the rate of economic recovery. Some economists worry such an expansionary policy can result in high long-term inflation.
In metals, gold was up $3.40, or 0.24%, to $1396 a troy ounce, after plunging $32 in the prior session.
The euro recently edged 0.74% lower against the U.S. dollar, and the greenback gained 0.28% against a basket of world currencies.
Apple (AAPL) was cut from "outperform" to "market perform" by JMP Securities amid concerns of how the crisis in Japan would affect the technology-giant's bottom line.
Websense (WBSN), the security software company, is considering selling itself, The Wall Street Journal reported.
European shares were lower: the English FTSE 100 was down 1.7% to 5598, the French CAC 40 slipped 2.2% to 3696 and the German DAX slipped 2% to 6513.
The Chinese Hang Seng edged higher by 0.1% to 22701 after the rally in Japan.