Stocks fell for a fourth day on Thursday, sliding to session lows at midday as a measure of investor anxiety hit its highest in five months after a top Senate Democrat warned that an agreement to avoid fiscal austerity measures would not be reached by the end-of-year deadline.
The comments by Senate Majority Leader Harry Reid just days before the hefty tax hikes and spending cuts go into effect pushed stocks down to the day's lows. The S&P 500 is now down 2.7 percent over the last four days, its worst such run in over a month.
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A four-day drop would also mark the S&P 500's longest losing streak in three months as Wall Street wakes up to the possibility that a "fiscal cliff" deal may not be reached until next year.
The CBOE VIX volatility index , a measure of investor fear, jumped above 20 for the first time since July, climbing nearly 5 percent in another sign of growing concern. Investors fear the so-called fiscal cliff could push the U.S. economy into recession next year.
The VIX's "recent spike seems to suggest that market participants are bracing for a rather significant uptick in market volatility in early 2013," WhatsTrading.com options strategist Frederic Ruffy said.
Reid, the Senate majority leader, criticized Republicans for refusing to go along with any tax increases as part of a compromise solution with Democrats. Referring to the fiscal cliff, he said: "It looks like where we're headed."
The Dow Jones industrial average slid 101.84 points, or 0.78 percent, to 13,012.75. The Standard & Poor's 500 Index lost 13.46 points, or 0.95 percent, to 1,406.37. The Nasdaq Composite Index dropped 29.51 points, or 0.99 percent, to 2,960.65.
Frank Lesh, a futures analyst and broker at Futurepath Trading in Chicago, said his clients have been delaying trading due to uncertainty about the negotiations' outcome, making the year-end period quieter than usual.
"With the added drama in Washington, we have got even more people sidelined," he said. "No one knows how this turns out or how the markets are going to react to it."
President Barack Obama was flying back to Washington from a Christmas holiday in Hawaii to push for more talks, while the top Republican in Congress planned to speak with House lawmakers. Still, gaps remained between the two sides.
Treasury Secretary Timothy Geithner announced the first of a series of measures that should push back the date when the U.S. government will exceed its legal borrowing authority - a limit known as the debt ceiling - by about two months.
Economic data also seemed to confirm worries about the impact the fiscal cliff may have on the economy.
The Conference Board, an industry group, said its index of consumer attitudes in December fell to 65.1 as the budget crisis dented a growing sense of optimism about the economy. The gauge fell more than expected from a downwardly revised 71.5 in November.
However, the job market continues to mend. Initial claims for unemployment benefits dropped 12,000 to a seasonally adjusted 350,000 last week and the four-week moving average fell to the lowest since March 2008.
Marvell Technology Group fell 3.5 percent to $7.14 after it said it would seek to overturn a jury's finding of patent infringement. The stock had fallen more than 10 percent in the previous session after a federal jury found the company infringed two patents held by Carnegie Mellon University and ordered the chipmaker to pay $1.17 billion in damages.
(Reporting by Edward Krudy; Additional reporting by Doris Frankel; Editing by Jan Paschal)