Stock traders: Here we go again

Stocks were off their session lows after European markets closed, but the major averages were still sharply lower across the board following a handful of disappointing economic news and over continuing worries over the stability of European banks.

The Dow Jones Industrial Average plunged sharply, led by GE and Hewlett-Packard, after squeezing out a small gain in the previous session. The Dow was down almost 530 points in its session low.

The S&P 500 and the tech-heavy Nasdaq also tumbled. The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged almost 30 percent to trade near 41.

All 10 S&P sectors were sharply lower, led by techs and industrials.

"Is this selloff really a surprise? The macro data continues to paint a dire fiscal future for the world—Investors are naïve to think this is a 'rough patch,'" said Todd Schoenberger, managing director of LandColt Trading. "The ingredients are in place for a prolonged period of the bears controlling this market. Investors need to proceed with caution."

Meanwhile, Zahid Siddique, portfolio manager of Gabelli Equity Trust, called today's move "an overreaction."

"We’ve always had these negative issues lingering, but nothing’s particularly new,” said Siddique.

On the economic front, factory activity in the Mid-Atlantic region plunged to minus 30.7 in August, hitting its lowest level since March 2009, according to the Philadelphia Federal Reserve Bank. Economists had expected for a reading of positive 3.7, according to a Reuters survey.

Adding to the woes, sales of existing homes fell 3.5 percent last month to a seasonally adjusted annual rate of 4.67 million homes, according to the National Association of Realtors. The figure is far below the 6 million that economists say must be sold to sustain a healthy housing market.

And earlier, investors were disappointed after the Labor Department reported weekly jobless claims jumped 9,000 to a seasonally adjusted 408,000, the highest in four weeks.

Stocks were also pressured following news that the U.S. federal and state regulators were intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to the Wall Street Journal.

European shares logged their biggest one-day decline in nearly three years, led by financials. Shares of European banks Deutsche Bank and Barclays fell sharply, dragging big U.S. financials such as Citigroup and Morgan Stanley.

Meanwhile, Morgan Stanley warned the global economy was "dangerously close to a recession" and revised their 2011 global growth forecast down to 3.9 percent from 4.2 percent and 2012 forecast to 3.8 percent from 4.5 percent.

“The path now looks even more bumpy, below-par and brittle than previously thought," Morgan Stanley said in a note, adding that emerging markets were no longer immune.

Gold surged above $1,820 an ounce, to hit new highs. Meanwhile, oil prices tumbled sharply.

Consol Energy was one of the few shares in the black amid a sea of red after Noble Energy said it will pay $3.4 to the energy producer to form a partnership to develop Consol's properties in the Marcellus shale.

Industrials also saw some heavy selling, including Caterpillar and United Tech.

Among techs, NetApp plunged almost 20 percent to lead the S&P 500 laggards, after the data storage equipment maker said it expects a weak second quarter. In addition, at least eight brokerages slashed their price target on the firm.

Investors will be closely watching Hewlett-Packard's earnings report this afternoon following rival Dell's disappointing sales outlook earlier this week, which fueled a selloff in the tech sector Wednesday.

Other large-cap techs were also saw a steep decline, including IBM and Oracle.

Sears declined after the retailer posted a bigger-than-expected loss, due to tepid sales numbers.

Coca-Cola announced it will plans to invest $4 billion more in China over the next three years starting from 2012.

Also on the economic front, the Consumer Price Index gained 0.5 percent in July, according to the Labor Department, amid higher gas prices. The core index, which excludes volatile food and energy, rose 0.2 percent.

And the Conference Board reported its index of leading economic indicators rose 0.5 percent in July, suggesting the economy won't see a robust pick up as previously expected.