Shares of Merck and Co. plunged nearly 27 percent Thursday on news that the pharmaceutical giant was pulling the popular arthritis pain medication Vioxx off the market in the largest drug withdrawal in U.S. history.

Merck announced it was withdrawing Vioxx, which had $2.5 billion in worldwide sales last year, because of studies that found that the drug increases the risk of heart attack and stroke after 18 months of continuous use. Merck shares fell $12.07, to $33.00, erasing more than $26 billion in market value.

The New Jersey-based Merck is one of the nation's most widely held stocks, particularly by mutual funds, and the announcement dragged the market benchmarks down with it. The Dow Jones industrial average and the Standard & Poor's 500-stock index both closed slightly lower but would have been up for the day if not for Merck. The Nasdaq composite index ended the day slightly higher.

"Really, the market was okay, except for Merck," said Andrew M. Brooks, head of stock trading at T. Rowe Price Associates Inc.

Merck rival Pfizer Inc., which makes competing medications Celebrex and Bextra, closed at $30.60, up 42 cents, or 1.39 percent.

The recall is likely to cut Merck's fourth-quarter sales by more than $700 million and shave 50 to 60 cents off Merck's earnings per share for the year, Chief Financial Officer Judy C. Lewent said at a news conference, according to a copy of her prepared remarks. The company had predicted earnings of $3.11 to $3.17 per share. Vioxx, which Merck sells for about $2.70 for a 25-milligram daily dose, is one of a class of painkillers known as Cox-2 inhibitors. It was the firm's fourth-biggest seller last quarter, said spokesman Tony Plohoros.

"The action we are taking is without question what is best for patients. That is always what is paramount for Merck," Lewent said. She said the company expects customers to return about one month's worth of the medication for refunds.

Merck was already facing serious concerns. The patent on Zocor, the cholesterol-reducing drug that is Merck's top seller, expires in 2006, and a recent study called into question the drug's benefit for patients who have had heart attacks.

"The action could not have come at a worse time," Morgan Stanley analysts wrote in a report Thursday. But they noted that the firm's shares are trading at less than 13 times earnings, lower than some of its competitors. "The sell-off may be overdone," they wrote.

Merck has a new arthritis pain drug in the works, Arcoxia, which was submitted to the Food and Drug Administration at the end of 2003, and analysts have high hopes for Zetia, a cholesterol absorption inhibitor that was developed in a joint venture with Schering-Plough Corp.

Some analysts said yesterday that the study that prompted Vioxx's recall may slow the approval of Arcoxia, which is a similar drug, and they are concerned about potential lawsuits from patients. Since Vioxx was introduced in 1999, about 84 million prescriptions for the drug have been written.

"The litigation risk is real," Goldman Sachs analyst James Kelly said. "We believe that Merck has taken rigorous, appropriate steps in the last week given this data. The battle will be fought on whether the earlier clinical trials should have driven Merck to a decision earlier."

Merck first alerted the FDA to a link between Vioxx and heart attacks in 2000, but regulators said Thursday that they determined at the time that a warning on the drug's packaging was sufficient.

In the largest previous pharmaceutical recall, Bayer AG paid more than $1 billion to settle nearly 3,000 lawsuits stemming from its 2001 decision to take the cholesterol drug Baycol off the market. Wyeth has set aside $16.6 billion to deal with product liability claims stemming from its diet drugs, popularly known as fen-phen.

"While Merck shares appear cheap, we see no reason to bottom-fish here. In our view there are no meaningful catalysts in the near term, and there are still many significant hurdles for Merck," First Albany Capital Inc. analyst Adam Greene wrote in a report published after the announcement.

The Vioxx announcement also sparked scrutiny of an unusual spike in Merck options Wednesday. The overall volume of Merck options -- contracts that give the buyer the right to buy or sell shares at a certain price at a certain date in the future -- was 10,125, slightly below this year's average of 12,000 contracts a day, said Pam Tvrdy, spokeswoman for the Options Clearing Corp.

But 2,900 of the options that changed hands Wednesday were "puts," allowing the owners to sell Merck shares at $42.50 on Oct. 16, more than 22 times the average daily volume for that type of contract, according to Bloomberg. The price of that contract rose from 10 cents Wednesday to more than $10 after the Vioxx announcement.

A spokesman for the Chicago Board Options Exchange said the exchange's department of market regulation reviews all unusual trading but does not comment on particular investigations. The Securities and Exchange Commission also investigates when there are unusual patterns in stock or options trading.

Merck's recall of the painkiller Vioxx sent the Dow Jones industrial average down 55.97 points yesterday.About 64 million Vioxx prescriptions have been written since 1999.