Report by Fed Panel Doesn't Allay Fears

NEW YORK, Aug. 28 -- Stocks tumbled Tuesday after a report showed that turmoil in the financial markets had sharply reduced consumer confidence and investors worried that the Federal Reserve would not respond aggressively to the problems.

All major stock indicators shed more than 2 percent, with the Dow Jones industrial average dropping 280 points to erase last week's gains. Trading curbs at the New York Stock Exchange meant to limit wild swings that kicked in as the slide steepened after the 2 p.m. release of minutes from the Aug. 7 meeting of the Federal Reserve's policymaking committee.

At that meeting, members of the Federal Open Market Committee viewed inflation as a greater risk to the economy than any slowdown because of trouble in the financial markets. They "expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages," according to the minutes.

In the 10 days after the meeting, financial markets froze up even more, and the committee revised its stance, saying that it viewed problems in the economy spurred by the market unrest to be its greatest concern.

But at the Aug. 7 meeting, Fed policymakers expressed mild concern about the impact of market turmoil on business investment. "Recent financial market developments were thought unlikely to have an appreciable adverse effect on capital spending," the minutes said.

Those words, while not surprising, seemed to reinforce worries by investors that the Fed is confident enough in the economy that it will not cut a key interest rate at its Sept. 18 meeting.

The market slide was particularly deep in the last hour of trading, continuing the late-day volatility that has been common in recent weeks.

The Dow, made up of 30 blue-chip stocks, ended the day down 280.28, or 2.1 percent, to 13,041.85. The Standard & Poor's 500-stock index, a broader market measure, lost 34.43, or 2.3 percent, to 1432.36. The tech-heavy Nasdaq composite index fell 60.61, or 2.4 percent, to 2500.64.

Leading stocks lower were shares of companies in the financial sector, which lost more than 3 percent. Contributing to their downfall, traders and money managers said, was an analyst report from Merrill Lynch, which downgraded the shares of Citigroup, Lehman Brothers and Bear Stearns to "neutral" from "buy," citing weakness in the mortgage and credit markets.

"Major brokers are downgrading other brokers," said David Dietze, chief investment strategist at Point View Financial Services. "They certainly don't like to take potshots on their peers. . . . Investors tend to give extra weight to those type of" reports.

The financial sector has taken a beating since concerns about subprime mortgages, or loans to home buyers with tainted credit, came to the fore six months ago. Those mortgages, which are now experiencing spiking defaults, were pooled together, sliced and diced into tradable securities by Wall Street investment banks and dispersed to pension funds, hedge funds, asset management firms and other investors around the world.

Fresh reports on the economy frayed investors' nerves, although the declines were not as large as some analysts had expected.