US stocks slumped decisively into bear market territory on Wednesday as investor sentiment buckled on concerns about the health of the financials sector and fears that slowing economic growth would hurt earnings at technology firms.

Nine of the ten leading industrial sectors fell, knocking the benchmark S&P 500 down 2.3 per cent to 1,244.63 - its lowest level since July 2006 and its first bear market since 2002.

The Dow Jones Industrial Average dropped 2.1 per cent to 11,246.06 while the Nasdaq Composite slipped 2.6 per cent to 2,234.89.

All three leading indices closed down more than 20 per cent from their recent highs.

Wall Street stocks rallied the most in a month on Tuesday as falling commodity prices boosted consumer-facing stocks and comments from the chief executive of JPMorgan that the credit crisis would ease helped financials roar ahead.

Still, a survey of financial newsletter writers by Investors Intelligence showed the most bearishness on US stocks since 1994. And the uptick proved short-lived as Tuesday’s winners gave up all of their gains on Wednesday.

Financials were the leading fallers. The sector has swung wildly this week as speculation that Freddie Mac and Fannie Mae might require further capital prompted denials from the government-backed mortgage companies’ regulator and investors rushed out of, and then back into, the stocks.

The pair came under pressure again on Wednesday after Fannie sold $3bn of two-year notes at higher yields than in previous offerings.

Fannie and Freddie fell 12.6 per cent to $15.40 and 23.8 per cent to $10.26 respectively. The financials sector declined 5.2 per cent and an index of investment banks plumetted 6.1 per cent, hitting six-year lows.

Merrill Lynch was a notable faller, tumbling 9.3 per cent to $29.74 after Fitch said it may cut the brokerage’s credit ratings on expectations of a “fourth consecutive quarterly loss in the second quarter due to on-going writedowns”.

Perennial whipping-boy Lehman Brothers slumped 11.4 per cent to $19.74.

Meanwhile, the technology sector was hurt by some critical commentary. Intel fell 5.3 per cent to $19.81 after Merrill Lynch said the maker of computer chips could fail to beat earnings estimates in the second half due to a weak US economy and tough competition.

A downbeat review of Cisco Systems also hit the sector. UBS analysts said the world’s biggest maker of computer-networking equipment faced a slowdown in the US and Europe and may post lower fourth-quarter revenues.

Cisco fell 5.7 per cent to $21.58 while the sector declined 3.2 per cent as a whole.

Even Alcoa ended the day down. The aluminium producer posted better-than-expected second quarter results and initially climbed before slipping 2.4 per cent at $31.54 as the mood on Wall Street darkened.

Battered steel stocks were the one bright spot, receiving a boost from an upgrade to Nucor’s shares.

Timna Tanners, an analyst with UBS, wrote: “The 18 per cent drop in the S&P Steel Index in the past week is excessive pessimism in our view, and we see robust North American steel sector earnings reminding investors of the group’s attractiveness.”

Nucor rose 3.9 per cent to $65.59, US Steel added 5.1 per cent to $158.17 while AK Steel Holding climbed 5.2 per cent to $54. But the materials sector as a whole followed Alcoa’s trajectory and closed down 0.8 per cent.

Oil prices slipped back for a third session late in the day but that did little to lighten the mood. The consumer discretionary and industrials sectors fell 2.7 per cent and 2.4 per cent respectively.

Dillard’s lost 10 per cent to $9.81, Wal-Mart slipped 2.4 per cent to $57.67 and Terex gave up 8.4 per cent to $43.04.

The energy sector also fell back, as refiners came under pressure. Sunoco fell 8.2 per cent to $36.41 and Tesoro slumped 12 per cent to $17.35.

Earnings and price target upgrades for US coal producers could not sustain a rally to the close. Peabody Energy and Consol Energy fell 1 per cent to $74.06 and 1.3 per cent to $92.45, respectively.

Searching for something positive to say of the recent stock moves, Tobias Levkovich, chief US equity strategist at Citigroup, could only point to the rise in volatility which signalled that markets might be near a bottom - at least temporarily.