Stocks tumbled, with the Dow and S&P down nearly three per cent, after a French bank froze three funds that invested in US subprime mortgages, prompting central banks to take steps to calm investors.

Evidence the US mortgage market crisis was having a global impact and spreading to other markets hammered financial stocks.

Goldman Sachs Group dropped nearly 6 per cent after the Wall Street Journal reported a second fund managed by the investment bank was under pressure to sell assets after falling in value.

The S&P financial index fell 3.8 per cent and the sector was one of the biggest drags on the S&P 500.

'The Fed has said the subprime issue is contained,' said Hugh Moore, partner with research-based advisory firm Guerite Advisors in Greenville, South Carolina, referring to the Federal Reserve.

'It's spread not just outside the industry, but outside the US. That really has people spooked.'

The Dow Jones industrial average sank 387.18 points, or 2.83 per cent, to 13,270.68. The Standard & Poor's 500 Index slid 44.40 points, or 2.96 per cent, to 1,453.09. It was the worst percentage drop for both indexes since the February 27 sell-off.

The Nasdaq Composite Index fell 56.49 points, or 2.16 per cent, to 2,556.49.
General Electric shares suffered their worst percentage decline in 18 months, while the stock of Wal-Mart Stores had its biggest fall in four years.

GE fell 3.8 per cent to $38.94 and Wal-Mart shed 4.1 per cent to $46.45, both on the New York Stock Exchange. Both are Dow components.

The European Central Bank injected a record $130 billion into the banking system to help calm jittery markets after BNP Paribas barred investors from redeeming 1.6 billion euros ($2.2 billion) worth of funds, blaming the conditions in the subprime mortgage market.

US President George W Bush said advisers told him there is enough liquidity in the system to let markets make necessary adjustments. The Bank of Canada also said it injected a larger-than-normal amount of funds to support the stability of the Canadian financial system.

Trading was extremely volatile, with the Nasdaq briefly turning positive. All three indexes added sharply to their losses in the last few minutes of trading.

Trading was heavy on the NYSE, with about 2.79 billion shares changing hands, well above last year's estimated daily average of 1.84 billion, while on the Nasdaq, about 3.54 billion shares traded, above last year's daily average of 2.02 billion.

Among financial stocks, Goldman dropped 5.7 per cent to $182.25 on the New York Stock Exchange. The Wall Street Journal had already reported on Thursday that the bank's internal hedge fund known as Global Alpha has lost about 16 percent for the year, citing people briefed on the matter. The fund has been the subject of persistent speculation for a couple of days.

Shares of Bear Stearns lost 5.8 per cent to $114.05. Navigator Capital on Thursday filed a lawsuit against a Bear Stearns hedge fund, claiming Bear Stearns had neglected to manage the fund properly before the collapse.

A spate of disappointing monthly sales reports from major apparel retailers added to the negative tone. The worst decliner was the stock of women's clothing chain New York & Co, which cut its second-quarter earnings outlook. The stock fell 16.7 per cent to $7.67 on the NYSE.

Home improvement chain Home Depot said it was in talks that may change terms of a previously agreed buyout of its supply division. Its stock, a Dow component, fell 5.3 per cent to $35.79 on the NYSE.

Before Thursday's losses, Wall Street had been on a three-day winning streak fueled in part by the Federal Reserve's statement on Tuesday that the economy was likely to keep growing despite turmoil in credit markets.

The benchmark 10-year US Treasury note's yield dropped to 4.78 per cent from 4.86 per cent late