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A discord between Cyprus and its international partners over a critical bailout threatened to ignite a liquidity crisis in the already ailing Cypriot banking sector. The turmoil sparked volatile trading on the Street, where stocks ended deep in the red. 

Today's Markets

According to preliminary calculations, the Dow Jones Industrial Average fell 90.2 points, or 0.62%, to 14421.49, the S&P 500 slid 12.9 points, or 0.83%, to 1545.80 and the Nasdaq Composite lost 31.59 points, or 0.97%, to 3222.60.

The situation in Cyprus remained chaotic. Earlier in the week, the Cypriot parliament rejected a divisive bank levy that was needed to finance $7.5 billion of a $13 billion international bailout. 

The tiny island country was racing to craft what is being called "Plan B," which could include help from Russia in a bid to stave off a caustic debt default. In a sign of just how serious the situation is, the European Central Bank said it will only provide emergency assistance to the Central Bank of Cyprus until next Monday, unless a bailout program is established. That means the country is on the brink of a liquidity crisis. In fact, Cyprus Popular Bank imposed a $336 ATM withdrawal limit and the country's central bank was said to be developing a bank rescue, according to published reports. 

A senior eurozone official told Reuters that Cyprus must quickly agree to a deposit levy otherwise it will be forced to wind down its biggest banks, wipe out depositors and face a potential exit from the currency bloc. 

"The deadline in effect forces leaders to come to an agreement before the end of Monday’s national holiday or face further extraordinary banking holidays and deepening of concerns over the survival of the Cypriot banking system," analysts at Nomura wrote in a note to clients. 

The Nasdaq suffered steeper losses than the broader markets Thursday morning following a high-profile earnings miss from tech giant Oracle (ORCL) as software licenses and cloud subscriptions slowed. The disappointing news from Oracle helped drive down shares of related stocks like SAP (SAP). 

On the economic front, equities continued to sink even after largely upbeat news on the state of the U.S. recovery.

The National Association for Realtors said existing home sales increased 0.8% in February to an annual rate of 4.98 million units. While that narrowly missed forecasts, it still represented the highest level since November 2009 and the NAR said national median prices enjoyed their largest annual jump since 2005. 

Meanwhile, the Labor Department revealed initial claims for unemployment benefits nudged narrowly higher last week to 336,000 from an upwardly revised 334,000 the week before. Economists had anticipated claims would rise to 342,000. 

Smoothing out weekly volatility, the four-week moving average for new claims slid 7,500 to 339,750 -- the lowest level since February 2008. The figures bolster sentiment that the labor market is continuing to rebound and comes after the Federal Reserve on Wednesday upgraded its unemployment rate forecast for this year and next. 

In manufacturing, the flash report from Markit showed U.S. manufacturing growth rose to a reading of 54.9 this month from 54.3 in February, mostly matching forecasts from economists.

Also, the Philadelphia Federal Reserve's March reading on factory activity in the mid-Atlantic region grew to 2 from -12.5 in February. Economists had been anticipating a smaller improvement to -2. 

In Europe, a closely-watched report from Markit showed the eurozone's business sector shrinking at the fastest pace in four months in March. The composite purchasing managers' index (PMI) checked in at 46.5, down from 47.9 in February. Readings above 50 point to expansion, while those below indicate contraction. 

Chris Williamson, Markit's chief economist, said the worrisome part of the report is that it suggests the "downturn has gathered pace again." He also noted the instability in Cyprus could have a negative impact on consumer confidence across the 17-member currency bloc and hit the April PMI reading. 

However, data coming out of China were stronger. HSBC's PMI gauge came in at 51.7 in March from 50.4 the month before -- logging its highest level in two months. The report suggests the manufacturing sector in the world's second-biggest economy is expanding at an accelerating pace. 

Hongbin Qu, the bank's chief economist for China, said the report implies "the Chinese economy is still on track for gradual growth recovery." Signs of recovery there have helped ease concerns among some analysts that the country was in for a so-called hard landing, in which growth cools down very quickly. 

In corporate news, Hewlett-Packard (HPQ) raised its quarterly dividend  10% to $0.1452 a share ahead of the opening bell. Shares of the blue-chip tech company were little changed in early trade. Nike's (NKE) quarterly results are due after the close Thursday. 

Elsewhere, energy futures were broadly lower. The benchmark U.S. oil contract dipped 69 cents, or 0.75%, to $92.81 a barrel. Wholesale New York Harbor gasoline slumped 0.18% to $3.111 a gallon. In metals, gold gained $2.90, or 0.18%, to $1,610.40 a troy ounce. 

Foreign Markets

The Euro Stoxx 50 slumped 1.22% to 2676.16, the English FTSE 100 dropped 0.97% to 6370.39 and the German DAX sold off 1.25% to 7902.27.

In Asia, the Japanese Nikkei 225 surged 1.3% to 12636 and the Chinese Hang Seng slipped 0.14% to 22226.

Follow Adam Samson on Twitter @adamsamson. 

Follow Matt Egan on Twitter @MattMEgan5