Stocks tumbled in their broadest decline in more than 15 months, triggered by evidence of slowing growth in service industries, the biggest part of the economy.
Disappointing profit results from ADC Telecommunications, a maker of networking equipment, and Mercury Interactive, a software developer, contributed to the slide. The Standard & Poor's 500-stock index erased its gain for the year.
"We have what could be the risk of an economic slowdown," said Hans Olsen, who oversees $2 billion as chief investment officer at Bingham Legg Advisers in Boston. The earnings announcements "that we're going to see over the next several weeks could make for a very tough October in the U.S. stock market."
The S&P 500 fell 18.08, or 1.5 percent, to 1196.39. The benchmark is down 1.3 percent this year. The Nasdaq composite index retreated 36.34, or 1.7 percent, to 2103.02. Both had their biggest one-day drop in almost six months. The Dow Jones industrial average plunged 123.75, or 1.2 percent, to 10,317.36.
The Institute for Supply Management said its measure of financial services, retail trade and other non-manufacturing businesses expanded at the slowest pace in more than two years. The gauge, which reflects activity in 87 percent of the U.S. economy, fell to 53.3 in September from 65 in August.
ADC Telecommunications and Mercury Interactive had the two biggest losses in the S&P 500. ADC slumped $3.06, or 13.5 percent, to $19.61. Mercury Interactive fell $5.29, or 14.3 percent, to $31.61.
D.R. Horton fell 84 cents, to $34.36, as an S&P gauge of home builders sank 3.3 percent on concern higher interest rates have caused mortgage demand to peak. KB Home retreated $2.99, to $67.42. Pulte Homes dropped $2.19, to $39.
Exxon Mobil declined $1.60, to $58.95, as a measure of energy shares in the S&P 500 sank 3.4 percent, capping the group's biggest four-day losing streak since August 2002.
Yum Brands, operator of the KFC, Taco Bell and Pizza Hut chains, advanced 56 cents, to $48.83, after the company increased its full-year profit forecast.
New York Stock Exchange composite index fell 121.74, to 7436.36.
American Stock Exchange index fell 37.60, to 1684.05.
Russell 2000 index of smaller-company stocks fell 18.86, to 644.98.
NYSE: 2.52 billion shares, up from 2.37 billion on Tuesday. Decliners outnumbered advancers 9 to 2.
Nasdaq: 1.96 billion shares, down from 2.03 billion. Decliners outnumbered advancers 4 to 1.
Crude oil for November delivery: $62.79, down $1.11.
* Gold for current delivery: $466.10 a troy ounce, unchanged from Tuesday.