The Federal Reserve has done what investors expected by saying said it would buy Treasury bonds to help the US economy.
The Fed said it would buy long-term Treasurys and sell short-term ones to help the economy regain momentum. It surprised investors when it said it would include more 30-year bonds in its purchases than expected.
Financial analysts said stocks dropped as investors came to the conclusion that the Fed expects the economy to take years to recover.
The major indexes fluctuated as they often do after major Fed announcements. The losses accelerated in the last hour of trading.
The Dow Jones industrial average lost 283.82 points, or 2.5%, and closed at 11,124.84. The Standard & Poor's 500 index fell 35.33, or 2.9%, to 1,166.76. The Nasdaq composite fell 52.05, or 2%, to 2,538.19.
The yield on the 10-year Treasury note fell to a record low of 1.86% from late yesterday's 1.93%.
After a two-day meeting, the Fed said it would buy 400 billion US dollars (£258 billion) in six-year to 30-year Treasurys by June 2012. Over the same period, it plans to sell 400 billion US dollars of Treasurys maturing in three years or less.
The move is intended to drive down interest rates on long-term government debt, and could lower rates on mortgages and other loans.
Those purchases are intended to send long-term rates down. The inclusion of more 30-year bonds than expected indicated that the Fed sees a need to keep rates lower for an extended period. And that took investors by surprise, Mr Pursche said.
"When the Fed decides to take this type of action, it's because things are serious," Mr Pursche said.
