Stocks tumbled more than 2 percent on Friday after the top German official at the European Central Bank resigned in protest of the bank's bond-buying program, which has been a major tool in fighting the region's debt crisis.

The resignation of Juergen Stark from the ECB throws into question policymakers' ability to deal with Europe's debt crisis, a problem that could engulf a world economy already teetering on the brink of recession.

Investors' rising fears were highlighted by a 12 percent jump in the market's main measure of expected turbulence, the VIX volatility index <.VIX>. The VIX neared 40, close to its highest level this year, as it marked its biggest jump in three weeks.

Stark's resignation is suggesting that there is a lot of pressure being built in the senior levels in the ECB, said James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania. There is an increasing realization that this is a major solvency issue in the banking system.

Doubts about President Barack Obama's $447 billion stimulus proposal added to the negative sentiment, with investors unconvinced his administration has the tools to revive the flagging U.S. economy.

The sell-off was broad and on solid volume. All 10 S&P sectors were in the red and more than 80 percent of stocks listed on the New York Stock Exchange fell. There were 8.7 billion shares traded on the NYSE, the Nasdaq and the Amex, above the exchanges' 20-day moving average.

Unnerving traders further were unconfirmed terrorism threats against New York City and Washington just ahead of the 10th anniversary of the September 11 attacks.

There is an extreme amount of negativity, said Sam Ginzburg, a senior trader at First New York Securities.

In talking to the sell-side desks that we do business with, they're not telling me that there are long-onlys adding to or initiating positions right now, he said.

The Dow Jones industrial average <.DJI> dropped 303.68 points, or 2.69 percent, to 10,992.13. The Standard & Poor's 500 Index <.SPX> dropped 31.67 points, or 2.67 percent, to 1,154.23. The Nasdaq Composite Index <.IXIC> dropped 61.15 points, or 2.42 percent, to 2,467.99.

The ECB has been buying up sovereign bonds to help hold down borrowing costs in some debt-strapped euro zone members, and the program has been considered critical to arresting market contagion. The resignation of Stark, who will step down by the end of the year, may deepen the gulf between the ECB and German guardians of central banking orthodoxy.

At a meeting of finance chiefs from the Group of Seven wealthy nations being held in France, U.S. Treasury Secretary Timothy Geithner on Friday pressed Europe's strongest economies to give unequivocal financial support to weaker euro zone states to overcome a debt crisis that threatens the world economy.

The S&P 500 ended the week 1.7 percent lower and is now down 8.2 percent this year.

Shares of some big companies fell after Obama's speech did not address proposals to allow large, multinational companies to repatriate an estimated $1.5 trillion of overseas profits to the United States at a reduced tax rate.

These are software companies, pharma companies that have billions of dollars stranded overseas, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. It's a disappointment that we didn't see a definitive package on bringing those profits back home.

Among stocks that would benefit from such a move, Xerox Corp fell 5.5 percent to $7.41 and Hewlett Packard fell 5.1 percent to $22.65.

Bank of America Corp officials discussed slashing roughly 40,000 jobs during the first wave of a restructuring, The Wall Street Journal said, citing people familiar with the plans. The shares slid 3.1 percent to $6.98.

McDonald's Corp fell 4.1 percent to $84.02. The world's largest hamburger chain reported a lower-than-expected rise in worldwide August sales at established restaurants on a steep drop in Japan and a lull in new product launches in the United States.

(Editing by Leslie Adler)