In a clear sign that investors are getting increasingly worried about the budget impasse in Washington, the Dow Jones industrial average was down around 180 points at its worst level and back below 15,000 on the third day of the partial government shutdown.
Investors are nervous as the crisis in Washington drags on and the hit to the economy and confidence mounts. Wall Street fears that lawmakers are so far apart that they won't agree on raising the debt-ceiling later this month, which raises the risks of the nation defaulting on its debts for the first time in history.
In early afternoon trading, the Dow Jones industrial average fell more than 180 points, or 1.2%%, to 14,955. The Standard & Poor's 500 index dropped 1.2% and the Nasdaq composite index was down 1.4%.
A six-page report from the U.S. Department of the Treasury released today drove home to Wall Street the potential risks the latest budget standoff on Capitol Hill poses to the economy and financial markets.
If the political brinkmanship that has led to the current government shutdown continues and leads to the first-ever U.S. default later this month, the impact would be "catastrophic," Treasury warned.
"A default would be unprecedented and has the potential to be catastrophic," according to Treasury. "Credit markets could freeze. The value of the U.S. dollar could plummet. U.S. interest rates could skyrocket. The negative spillovers could reverberate around the world. And there might be a financial crisis and recession that could echo the events of 2008 or worse."
Treasury's bleak assessment on the potential fallout from the political dysfunction follows similar comments from President Obama in an interview with cable business channel CNBC after the market closed last night. "I think Wall Street should be concerned," Obama said.
The mood remained cautious as fears that the U.S. could be heading for an even bigger economic shock grew. American lawmakers have to agree to an increase in the debt ceiling by Oct. 17 or the world's largest economy may be in default of its debts.
Congress must periodically raise the limit on government borrowing, but the once-routine matter has become the subject of bitter fights between Republicans and Democrats.
SERVICE SECTOR: Expands at slower pace
As well as undermining confidence in the ability of the U.S. to pay back what it owes, a U.S. default could send shockwaves round the world economy, threatening the patchy economic recovery.
Wall Street, while worried, still expect lawmakers to strike a deal in time and avoid a worse-case scenario, a line of thought shared by billionaire investor Warren Buffett. In an interview with CNBC this morning, Buffett said: "We will go right up to the point of extreme idiocy, but we won't cross it."
WHAT TO WATCH: Rising rates impact on bonds
ECONOMY: Shutdown clogs government's business data pipeline
On Wednesday, President Obama met with lawmakers in Congress but little of substance appeared to have been achieved in the dispute that has idled hundreds of thousands of workers and curtailed services nationwide.
"This failure in bipartisan politics could have wider implications than merely shutting down the U.S. government," said Alex Conroy, a sales trader at Spreadex. "If both sides continue to play chicken with each other and fail to agree before the debt ceiling deadline, the government would only have cash left to pay bills and the chance of default goes from unthinkable to near certainty."
That's hardly a backdrop to encourage euphoria in markets.
OBAMA: Wall Street should be worried
EMPLOYMENT: Jobless claims tick up 1,000 to 308,000
In economic news, the Labor Department reported Thursday that the number of Americans
seeking unemployment benefits rose
by only 1,000 last week. Theless volatile four-week average for applications fell to 305,000. That's the lowest since May 2007, seven months before the recession began.
Trading in Asia was fairly mixed. Though Hong Kong's Hang Seng rose 1% o 23,214.40, Japan's Nikkei 225 index fell 0.1% to close at 14,157.25.
In Europe, the FTSE 100 index of leading British shares was up 0.5%, while Germany's DAX rose 0.1%. The CAC-40 in France was 0.3% lower.
The focus in markets will likely remain on developments in Washington over the day although a run of economic data, such as the non-manufacturing survey from the Institute for Supply Management will provide some distraction. Friday's key data release - September's nonfarm payrolls report - is not expected.
One offshoot of the U.S. budget stalemate is that investors think it's now less likely that the U.S. Federal Reserve will start to reduce its monetary stimulus this month, or maybe even this year. For much of the summer, investors thought a tapering of the stimulus would happen this year.
"The longer this goes on with the Fed feeling partially blind on assessing the economy, the further away Fed tapering becomes," said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ.
On Wednesday, the Dow fell 58.56 points, or 0.4%, to 15,133.14 and the S&P 500 dropped 1.13, or 0.1%, to 1,693.87. The Nasdaq fell 2.96 points, or 0.1%, to 3,815.02.
WEDNESDAY: Wall Street closes lower on shutdown jitters
Contributing: Associated Press