The dramatic drop in U.S. stocks began yesterday when sharp declines in the Chinese market triggered a global equities sell-off. News of a larger-than-expected drop in durable-goods orders heightened skittishness, even before the U.S. markets opened.

By the end of the day, the Dow Jones industrial average had suffered its largest one-day decline in percentage since 2003, dropping 416.02, or 3.3 percent, to 12,216.24. The sharpest decline occurred shortly before 3 p.m., when the Dow dropped 200 points -- triggered by a technological glitch that caused a backlog of trades to be calculated at nearly the same time.

The Nasdaq composite index dropped 96.66, or 3.9 percent, to 2407.86. The broader Standard & Poor's 500-stock index lost 50.33, or 3.5 percent, to 1399.04.

The slide in U.S. shares erased about $600 billion in market value. Following losses last week, the blue-chip average erased all its gains for the year so far.

In early trading, even as the Dow dropped 100 points, many analysts shrugged off the decline, saying such fluctuations were not surprising and were relatively small, given that the Dow has gained 10,000 points since the Black Monday crash of 1987.

But after the rapid descent that put the Dow down more than 540 points, the tension increased, and traders speculated about what had caused the afternoon plunge.

"You have to figure . . . there must have been someone very large who got out," said Chris Low, chief economist with FTN Financial. "Every single market is down. I've rarely seen such a sell-off."

Analysts and economists said a number of factors contributed to the market's slide. "It starts out with the Chinese government saying they're going to crack down on speculators," Low said.

Every sector was affected, but among the hardest hit were commodities, which were riding high based on the belief that demand from China would only grow. The materials, energy and technology sectors were also knocked down, while emerging-market companies and riskier small-cap stocks took a hit as investors fled to safer turf, such as bonds.

The Russell 2000 index of smaller companies fell 3.8 percent, to close at 792.66.

With the markets awash in cash, investors have been willing to venture out to riskier investments, a trend that had to reverse at some point, analysts said. Yesterday, they were turning to safer investments. "Treasuries were up, large-cap stocks are off 1 percent, emerging markets are down several percent," said Jerry A. Webman, chief economist at OppenheimerFunds. "By the time you get to Shanghai, you're off 8.5 percent. There is a flight to quality."

Declining stocks outnumbered winners by more than 6 to 1 on the New York Stock Exchange; 4.3 billion shares were traded, compared with 2.8 billion Monday.

Some market strategists said they were holding off on buying, seeing a potential for larger drops. Others characterized the retreat as a long-overdue correction and good for a market still fundamentally strong. They said recent increases in oil prices, geopolitical events in the Mideast and growing concern about the subprime-mortgage market combined to set off the market downturn.

"The trick is for real investors not to overreact," Webman said. "The last thing people want to do in this kind of environment is get off their long-term financial plans."

Movers U.S. Steelshares dropped $7.39, to $86.51.

Apple fell $4.72, to $83.93, after delaying the launch of Apple TV.

Caterpillar dropped $2.43, to $64.83.

Walt DisneyCo.fell $2.01, to $33.10.