Wall Street is finally waking up to the troubling prospect that lawmakers may not reach a deal to avert the “fiscal cliff” before the new year, with stocks swinging dramatically Thursday in response to news from Capitol Hill.

Financial markets had been climbing in recent weeks on the expectation that President Obama and the Congress would reach an agreement, adding further momentum to an economy that has been gaining strength.

But with the final days trickling away before the year-end deadline, the markets Thursday experienced their greatest volatility since the summer. It was also the fourth consecutive day of losses on Wall Street.

Investors responded almost instantly to pronouncements from leading lawmakers. Shares plunged in the morning after Senate Majority Leader Harry M. Reid (D-Nev.) predicted a deal would be unlikely by Tuesday and, with investors grasping at a straw of hope, bounced back in the afternoon when House Speaker John A. Boehner (R-Ohio) said he would call members back to work Sunday.

Analysts and economists said investors were finally recognizing that a typical last-minute Washington deal could prove elusive and instead lawmakers were gearing up for hand-to-hand combat over the weeks to come. If there’s no deal before Tuesday, taxes would rise for most Americans and deep government spending cuts would begin, dealing the economy a painful blow.

The difference between the Democratic and Republican plans floated last week was relatively small.

“There’s a realization sinking in,” said Vincent Reinhart, chief U.S. economist at Morgan Stanley. “It’s a learning process. People are beginning to think that the cliff is with us for a while longer.”

The Dow Jones industrial average lost 150.5 points Thursday before recouping most of its losses to finish down 18.28, at 13,096. The Standard & Poor’s 500 fell 18 points before rebounding to end down 1.73 points, at 1418.10.

Beyond unsettling the markets, the fiscal cliff of automatic tax increases and spending cuts is already beginning to take a bite out of the U.S. economy, which had been showing signs of accelerating growth.

On Thursday, a new report on consumer confidence came in well below the analysts’ expectations, reversing months of steady gains. The Conference Board consumer confidence index plunged to 65.1 from 71.5, most of the drop driven by declining consumer expectations about what the future will hold.

“All the talk, hype and grim reality of the fiscal cliff finally caught up with consumers in December,” Mark Vitner, senior economist at Wells Fargo, wrote in a report.

Several economic analysts are drawing parallels between what is happening to markets and consumer confidence now and their performance during the 2011 debate in Washington over raising the limit on federal borrowing.

During that debt-ceiling showdown, the failure of negotiations to reach a timely deal brought the government to the brink of default, prompting Standard & Poor’s to downgrade the U.S. credit rating and dealing a heavy blow to consumer confidence.

In the lead up to that debt crisis, investors remained optimistic that policymakers would ultimately reach a deal until the deadline drew near. Then, markets plunged as investors realized that congressional negotiations might fail and the government would default on its debt.

“Both confidence and markets remain[ed] pretty sanguine up to pretty close to the point where it looked like there was actually a chance the debt limit would not be raised. And then, of course, there was a pretty sharp shock,” Federal Reserve Chairman Ben S. Bernanke said this month. “It’s not unusual to see markets being complacent.”

While debate over the fiscal cliff has called into question the financial health of the U.S. government, the value of government bonds has been rising amid the growing uncertainty. On Thursday, the price of a 10-year Treasury bond rose while the yield declined by .015 percentage points, to 1.736 percent. A lower yield means investors think the Treasury bond is less risky than it was the day before.

Despite concerns about the health of the economy, investors see U.S. government securities as a haven — and have continued to invest in them.

For most Americans, going over the fiscal cliff would mean declining confidence in the economy, rising anxiety and a near-immediate hit to take-home pay as higher taxes take effect. But the unemployed would be especially hard hit. Unless an agreement is reached, many jobless Americans will not be able to apply for unemployment benefits after Saturday, and no more checks will arrive after next week.

“The eleventh hour has arrived. Millions of unemployed workers and their families are hoping that Congress will come through for them this holiday season,” said Christine Owens, executive director of the National Employment Law Project. “Other consequences of going over the fiscal cliff won’t be felt for some time, but losing emergency unemployment compensation will deliver an immediate and severe blow to people who are already down.”