Stocks sank nearly 4 percent on Thursday on growing fears the euro zone's efforts to tackle its sovereign debt crisis will fall short, jeopardizing the global economic recovery.

Selling picked up speed late in the day and indexes closed around their session lows after the U.S. Senate voted to end debate on the sweeping overhaul of financial regulation, allowing a final vote on the bill later on Thursday or Friday.

The S&P 500 finished down 12 percent from its April 23, 2010, closing high, signaling a correction and marking the worst day since late April 2009. The index also ended below its 200-day moving average, a sign the momentum downward could build.

The correction comes on the back of a stream of negative news out of Europe, from worries over Greece's debt crisis to Germany's unilateral decision this week to ban naked short-selling.

Banks and commodity-related stocks, which are more sensitive to economic cycles, were among the hardest hit, with the KBW Bank index <.BKX> sliding 5.1 percent. The S&P Energy index <.GSPE> fell 4.4 percent, while U.S. June oil futures fell 2.7 percent, or $1.86, to settle at $68.01 a barrel in volatile trade on the day of its expiry.

The primary mover is coming from Europe. There are still fears of a debt crisis over there and the fact that it could spread to the banking system, said Bernie McSherry, NYSE trader at Cuttone & Co in New York.

The Dow Jones industrial average <.DJI> dropped 376.36 points, or 3.60 percent, to 10,068.01. The Standard & Poor's 500 Index <.SPX> slid 43.46 points, or 3.90 percent, to 1,071.59. The Nasdaq Composite Index <.IXIC> lost 94.36 points, or 4.11 percent, to 2,204.01.

May individual equity options and some options on stock indexes will stop trading at Friday's close and expire on Saturday, which may increase volatility.

The Chicago Board Options Exchange Volatility index <.VIX>, Wall Street's so-called fear gauge, surged 31.3 percent earlier to 46.37, its highest intraday level in more than a year. But the VIX pared back slightly to end up 29.6 percent at 45.79.

In a sign of heightened fear, 2.5 million puts have traded across all the exchange traded funds, which is three times the normal and about 51 percent of the total put volume.

Disappointing economic data on the domestic front also contributed to the downdraft. The number of U.S. workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April.

The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the U.S. mid-Atlantic region accelerated less than expected in May.

Large manufacturers' shares ranked among the heaviest weights on the Dow, with Caterpillar down 4.5 percent at $58.67 and 3M falling 3.5 percent to $79.62.

Uncertainty surrounding the final outcome of the financial reform bill weighed on financial shares and hindered the market overall, McSherry said.

Put it all together and there's a whiff of fear back in the air. Hopefully, it doesn't metastasize and get worse.

Analysts said the correction could be healthy for a market that surged as much as 80 percent from the March 9, 2009, closing low. But if worries over the recovery's sustainability

persist, it will be difficult for stocks to bounce back.

(Reporting by Leah Schnurr; Editing by Jan Paschal)

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