The Dow Jones industrial average fell 85.78, or 1.2 percent, to 7,400.80. The broader Standard & Poor's 500 index fell 10.31, or 1.3 percent, to 784.04, while Nasdaq composite index fell 7.74, or 0.5 percent, to 1,483.48.
Investors doused a two-week-old stock rally Thursday as concerns emerged that the Federal Reserve's new bond-buying campaign could wind up hurting the dollar and causing inflation.
Banking and other financial shares pulled the market lower, but energy stocks got a boost from soaring crude oil prices.
The Dow Jones industrial average fell 85.78, or 1.2 percent, to 7,400.80.
The broader Standard & Poor's 500 index fell 10.31, or 1.3 percent, to 784.04, while Nasdaq composite index fell 7.74, or 0.5 percent, to 1,483.48.
The retreat came a day after stocks surged in reaction to the Fed's aggressive plans to pump more than $1 trillion into the financial system by buying Treasury bonds and stepping up its purchases of other debt securities. The aim is to lower borrowing rates and stimulate lending.
On Thursday, investors began to digest the possible downsides of the Fed's program such as a potentially weaker dollar. That can lead to higher prices for commodities such as oil and grains, and eventually everyday products like gas and food.
Skepticism about how long it would take for the effects of the Fed's program to take hold also weighed down shares, particularly those of banks. Investors have been hungry for any signs that confidence may finally return to battered U.S. banks, and the market has had a generally dim view of the government's efforts to date to get lending moving again.
Declining issues narrowly outnumbered advancers on the New York Stock Exchange, where consolidated volume came to 8.8 billion shares compared with 9 billion shares Wednesday.
"After the initial euphoria surrounding the surprise announcement yesterday, there's a little more analysis of this going on and its leading to some questions," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research.
Wall Street's move lower follows a buying spree that has driven stocks sharply higher since last week. Even with Thursday's slide, the Dow is still up 13 percent and the S&P 500 index is up 15.9 percent over the past eight days. The gains are impressive considering that only a few weeks ago the market was trading at levels not seen in more than a decade.
Some analysts warned at the start of the rally that it could turn out to be the type of short-lived boost that comes about during bear markets, which are generally defined as a drop of at least 20 percent. The market is still about half below its peak in October 2007.
Joe Balestrino, a portfolio manager at Federated Investors Inc., said he doesn't expect the Fed's new money-injection program will be enough on its own to support an extended stock market advance.
"We're in a very weak environment," Balestrino said. "We don't see anything sustainable here." Stephanie Giroux, chief investment strategist at retail brokerage TD Ameritrade, said she was optimistic that the Fed's latest medicine would work, but that any rebound is likely to be "slow and muted."
Some of traders' jitters Thursday came ahead of a quarterly expiration of options contracts on Friday. The sudden settling of many of those transactions can cause a surge in trading volume and more volatility in stock prices.
Energy stocks bucked the market's slide as oil surged above $50 a barrel. Oil jumped as the dollar sank against other major currencies in response to the Fed announcement. When the greenback weakens it essentially makes crude cheaper in other currencies.
Chevron Corp. gained 54 cents, or 0.8 percent, to $67.13, while Occidental Petroleum Corp. rose $2.14, or 3.8 percent, to $59.98.
Light, sweet crude rose $3.47, or 7 percent, to settle at $51.61 a barrel on the New York Mercantile Exchange.
Investors got a dose of good news Thursday from General Electric Co., which forecast a profitable first quarter and full year for its struggling finance unit. Fears that falling real estate values and unpaid credit card debt could further damage GE Capital have sent its stock price down 37.5 percent this year. GE's slipped 19 cents to $10.13.
Stocks rose early in the day Thursday after a report on jobless claims gave mixed messages about the state of the economy.
The number of initial requests for unemployment insurance last week dropped to a seasonally adjusted 646,000 from the previous week's revised figure of 658,000, which exceeded economists' estimates. But the number of people continuing to receive benefits set a new record for the eighth straight week, jumping 185,000 to a seasonally adjusted 5.47 million.
Financial stocks, which led the rally that began last week, couldn't hold their gains and dragged the market lower. Some investors were selling to lock in profits after several of those stocks doubled or tripled in a matter of weeks.
Citigroup fell 48 cents, or 15.6 percent, to $2.60, while JPMorgan Chase & Co. dropped $2.16, or 8 percent, to $24.95. Citigroup had traded just under $1 early last week.
Analysts also said short-selling was likely at play on Thursday, as investors placed bets that stocks would fall further.
In corporate news, FedEx Corp. said it plans to cut more jobs and trim wages again, as the company reported its fiscal third-quarter profit tumbled 75 percent. The shipping company is often seen as a bellwether for the economy. FedEx jumped $2.05, or 4.8 percent, to $45.10.
The Russell 2000 index that tracks small company stocks fell 4.37, or 1 percent, to 413.26.
Bond prices were mixed a day after steep gains because of news from the Fed.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 2.60 percent from 2.50 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, slipped to 0.18 percent from 0.20 percent late Wednesday.
The dollar mostly fell against other major currencies, while gold prices soared.
Overseas, Britain's FTSE 100 rose 0.3 percent, Germany's DAX index gained 1.2 percent, and France's CAC-40 rose 0.6 percent. Japan's Nikkei stock average fell 0.3 percent.