NEW YORK (CNNMoney.com) -- Stocks slumped Tuesday, with the Dow falling as much as 504 points, as the Fed's plan to loosen credit markets failed to counter investor pessimism about the government's ability to rescue the markets.
Ben Bernanke's dour economic outlook in an early afternoon speech added to the day's weakness. And a report showed consumer borrowing in August fell for the first time since January 1998.
With 30 minutes left in the session, the Dow Jones industrial average (INDU) had lost 368 points or 3.7%. The blue-chip average ended below 10,000 Monday for the first time in almost 4 years.
"There is this feeling that no matter what is done, it won't be enough, " said Darin Pope, chief investment officer at United Advisors of Secaucus.
Credit markets remained tight Tuesday, but showed some improvement from the previous day. Treasury prices inched lower, with the yields modestly higher. The dollar slumped versus other major currencies. Oil and gold prices gained.
Stocks plunged nearly 370 points Monday, with the Dow losing as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to soothe investors.
Stocks initially rose Tuesday on the Fed's latest plan, but gave up those gains by midmorning, turning lower.
"Nearly every day there is another announcement where something is going to be done to prop up the markets," Pope said. "Stocks might see an initial pop, but then the skepticism kicks in."
Afternoon comments from Central bank Chairman Ben Bernanke exacerbated the stock selling. He said the economic outlook has worsened and the financial crisis will hurt the economy well into next year. He also implied that more interest-rate cuts are on the way. (Full story).
The minutes from the last Fed policy meeting were released shortly after Bernanke's speech. The minutes showed the bankers were equally worried about growth and inflation at the Sept. 16 meeting, in which they opted to hold interest rates steady. The meeting occurred one day after Lehman Brothers filed the biggest bankruptcy in history. (Full story)
Fed plan: The Federal Reserve said Tuesday it will buy commercial paper, short-term debt that companies use to finance daily operations, from individual companies. Panicky investors have been less willing to buy this kind of debt lately, making it hard for companies to get the money they need to operate.
The Fed move is aimed at creating a market for this kind of debt, ultimately loosening up the frozen credit markets. (Full story)
Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has stalled the broader financial system and hurts consumers.
"It's another step in the right direction, but it's hard to get too excited about this because nothing yet has worked," said Bill Stone, chief investment strategist at PNC Financial Services Group.
"Eventually, if they [the government] stack up enough things, something will work," he said.
The government has taken a number of dramatic steps of late to try to get the markets functioning properly again amid the housing collapse and subsequent credit crunch.
On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion by the end of the year.
And on Friday, President Bush signed into law the $700 billion bank bailout, which involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again.
Stone said that it's positive that the Fed and the Treasury are taking aggressive and creative approaches to handling the current crisis. However, people are exhausted after all that's happened and they are less willing to cheer initiatives that won't take kick in for some time.
Company news: After the close Monday, Bank of America (BAC, Fortune 500) reported a steep drop in profit that was short of estimates and cut its dividend. The bank also said it will raise $10 billion through a stock sale and that the company will need to set aside money for bad loans through the coming year. Shares fell 18% Tuesday. (Full story)
AIG (AIG, Fortune 500) was in the spotlight Tuesday, in the second of several House hearings into what led to the current crisis. The government had to bail out the insurance giant with an $85 billion credit line last month to keep it from imploding. (Full story)
On Monday, the House Oversight Committee questioned Richard Fuld, chief executive of Lehman Brothers, which went bankrupt last month.
A variety of bank stocks fell Tuesday, including Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).
Morgan Stanley shares had fallen as much as 40% during the session on rumors that Japanese bank Mitsubishi UFJ was going to back out of its deal to buy a stake in the company. However, Morgan denied the rumor. (Full story).
But the declines were broad, with 28 of 30 Dow components sliding. Besides the financials, other losers included Walt Disney (DIS, Fortune 500), GM (GM, Fortune 500), Pfizer (PFE, Fortune 500), Home Depot (HD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500), all of which lost between 4% and 5%.
A variety of transportation stocks slid, with airlines, truckers and railroads falling. The Dow Jones Transportation (DJTA) average lost 2.8%.
Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 1.23 billion shares. On the Nasdaq, decliners topped advancers by three to one as 2.38 billion shares changed hands.