Stocks fell sharply in late afternoon trading in New York on Thursday as concerns about the global financial system mounted and investors priced in a deep recession.

    The Standard & Poor’s 500 stock index was down nearly 7.6 percent and the Dow Jones industrial average was down 678.91 points, or about 7.3 percent, both posting one of their worst days in post-war history. The Nasdaq composite was down 5.4 percent.

    Wells Fargo, Morgan Stanley and other bank stocks were among the biggest losers and the financial sector as a whole was down nearly 11 percent in late afternoon trading. But the major indexes were also pulled down by big drops in stocks like Exxon Mobil, General Electric and Chevron.

    The sell-off suggests investors are pricing in a much deeper recession than the markets had previously thought was likely. New data released on Thursday also showed that retail investors were withdrawing tens of billions of dollars from stock mutual funds — a sign that the panic on Wall Street was spreading.

    Thursday’s decline came after the Treasury Department signaled that it would move quickly to inject money directly into big financial firms in addition to buying up to $700 billion in troubled loans and securities from the companies.

    "There is a downward spiral of fear still about whether the measures put in place will be enough," Richard Sparks, senior equities analyst at Schaeffer’s Investment Research, said. "You continue to see selling into any strength."

    On Wednesday, the Federal Reserve, the European Central Bank, the Bank of England and other central banks moved to jointly cut their benchmark interest rates by half a point, seeking to renew confidence in an increasingly panicked international financial community.

    But financial stocks continued to struggle Thursday. Shares of Morgan Stanley were down about 22 percent on more speculation about the status of a planned $9 billion investment by Japan’s top bank, Mitsubishi UFJ Financial Group. Morgan Stanley, as it did earlier this week, denied the speculation and again said that the deal was on track.

    Wells Fargo shares were down about 16.9 percent, Citigroup was down 7 percent, Bank of America 9 percent and JPMorgan Chase 3.7 percent.

    Shares in the insurance giant, American International Group, declined almost 21 percent, after the Federal Reserve Board said that it would provide up to $37.8 billion to the company to help it deal with a rapidly dwindling supply of cash.

    Shares of the automaker, General Motors, fell 31 percent, to $4.76, after the company said its European sales declined through the first three quarters. Ford shares were down 21.8 percent, to $2.08.

    Some analysts said that the end of a ban on short-sellers may have played a part in Thursday’s falls, contributing in particular to the sharp declines in some bank share prices, such as that of Morgan Stanley.

    But Mr. Sparks said the sharp declines were occurring even when the ban was in place.

    Oil prices continued to decline, falling $1.97 to $86.98 a barrel as inventories at wholesalers rose twice as much as forecast in August.

    In European trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, closed down 2.4 percent, while the FTSE 100 index in London declined 1.2 percent. The CAC-40 in Paris fell 1.5 percent, and the DAX in Frankfurt 2.5 percent.

    A day after interest rate cuts elsewhere in the world, central banks in Taiwan and South Korea both cut their main rates by a quarter-point. The Hong Kong Monetary Authority also cut its base rate by a half-point to 2 percent.

    Meanwhile in Iceland, the government seized Kaupthing Bank, the country’s largest lender, effectively completing the nationalization of its banking system.

    In Asia, the Nikkei 225 stock average fell 0.5 percent, after a rout Wednesday wiped 9.4 percent off the index.

    In Hong Kong, the Hang Seng index was up 3.3 percent, after an 8.2 percent slump Wednesday. The S.&P./ASX 200 index in Sydney fell 1.5 percent.

    In spite of the central bank moves this week, which have included a flood of liquidity into the markets, the strains in the credit market showed little sign of easing.

    Banks in Hong Kong left their main lending rates unchanged, even after the central bank’s move, as the rates lenders must pay to borrow in the interbank market remained prohibitive.

    Michael T. Darda, chief economist at the research firm MKM Partners, said spreads in short-term funding markets had hit a record high Thursday morning.

    He said "corporate and high-yield markets remain under incredible stress, meaning long-term funding markets are dislocated as well. In sum, it is still too soon to call for a lasting bottom in stocks or t

    The three-month London interbank offered rate, or Libor, rose to 4.75 percent, according to the British Banking Association.

    The spread, or gap, between the yield on safe three-month United States government securities and the rate that banks charge one another for dollar loans of the same duration rose slightly, to 4.11 percentage points, suggesting that banks remain extremely reluctant to lend to one another.

    "To see little or no reaction in the fixings is very disappointing and reinforces the fact that Libor is broken and that the transmission mechanism from central banks isn’t working," Barry Moran, a Dublin-based currency trader at Bank of Ireland, told Bloomberg News. "Things are still very stressed and we don’t know what’s going to fix it in the short term."

    In a research note, Dariusz Kowalczyk, chief investment strategist at CFC Symour in Hong Kong, said: "Lower policy rates did little to diminish market rates and failed to restore confidence in the banking system. In fact, using up of monetary ammunition with such little effect may hurt sentiment by highlighting the severity of the crisis."

    "Deep recession in all major developed economies and many others is still looming," he said.

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    David Jolly, Bettina Wassener and Graham Bowley contributed reporting.