The Dow, up 135 points in morning trading, ended down about 69. It was the eighth drop for the Dow in 10 days. Wednesday's trading extended a streak of volatility since stocks went to their highest level of the year in late April.
The late reversal underscored how jittery traders are about Europe. They are worried that heavy debt loads in European countries and more rounds of cost-cutting will hamper a recovery there, which could spread quickly to other regions.
"We had a nice rally all day and we expected it to have had legs," said Phillip Orlando, chief equity market strategist at Federated investors in New York, which manages about $400 billion. The sudden sell-off, he said, suggests "that investors are as nervous as a long-tailed cat in a room full of rocking chairs."
The euro fell in late trading, pulling major stock indexes lower, following a Financial Times report that China is reviewing its holdings of European government bonds because of the crisis in government debt there.
China has been seeking ways to diversify its massive foreign exchange holdings out of dollars for some time. However any indication that it was losing confidence in the euro, leading it to sell some portion of its European bond holdings, would deliver a major blow to the European currency.
The sliding euro has become a symbol of waning confidence in Europe's ability to contain its debt problems. The euro remains close to the four-year low it hit last week. It fell to $1.2179 Wednesday.
"The inability of the market to hang on to the early gains today certainly does not send a very positive message," said Teddy Weisberg, a New York Stock Exchange floor trader with Seaport Securities. "It's a function of there being no confidence among investors."
The Dow fell 69.30, or 0.7 percent, to 9,974.45. It was the first close below 10,000 since Feb. 8 when the Dow finished at 9,908.
The broader Standard & Poor's 500 index fell 6.08, or 0.6 percent, to 1,067.95. The Nasdaq composite index closed down 15.07, or 0.7 percent, to 2,195.88.
About two stocks rose for every one that fell on the New York Stock Exchange. Consolidated volume came to 7.1 billion shares, compared with 7.4 billion traded Tuesday.
Treasury prices pared an early slide as investors late in the day went back in search of safe investments. The yield on the benchmark 10-year Treasury note rose to 3.19 percent from 3.16 percent late Tuesday.
Crude oil rose $2.76 to $71.51 per barrel on the New York Mercantile Exchange. Gold rose.
The stock slump at day's end marked an opposite to the pattern seen on Tuesday, when traders chipped away at a steep slide by the close and the major indexes ended little changed.
The slide in stocks has rattled investors still shaken by the market's plunge in late 2008 and early 2009.
"Everyone is so scared from what happened back in the big crash and now they're just all gun-shy," said Frank Ingarra, co-portfolio manager at Hennessy Funds.
Stocks were higher for most of the day after traders focused on economic news. Two reports from the Commerce Department offered the latest evidence that the U.S. economy is improving. Orders for big-ticket manufactured goods rose 2.9 percent last month. It was the biggest jump in three months and more than double the gain economists polled by Thomson Reuters had forecast.
U.S. manufacturing has been strong throughout the recovery. April's figures were boosted by a big rise in transportation orders. Excluding transportation, orders fell 1 percent.
The government also said that sales of new single-family homes rose 14.8 percent to an annual rate of 504,000 units after buyers raced to secure an expiring tax credit. That followed a 29.8 percent rise in March that was the biggest increase in 47 years. The latest gain was well ahead of estimates.
The slide in stocks extended their slump for May. At its 2010 high last month, the Dow was up 71.2 from a 12-year low in March 2009. Since then, it's fallen 1,231 points, or 11 percent.
A drop of more than 10 percent from a peak in short order is considered by most analysts a "correction."
Kevin Giddis, managing director of fixed income at Morgan Keegan in Memphis, said the slide in stocks and the rush to Treasurys has been overdone. The economic numbers confirm that the economy is in far better shape than it was two years ago when Lehman Brothers collapsed and credit evaporated.
"It is a giant fear trade that is being overblown," he said.
Among technology stocks, Apple Inc. moved ahead of Microsoft Corp. as the world's largest tech company by the value of its outstanding shares.
Apple fell $1.11, or 0.5 percent, to $244.11, while Microsoft fell $1.06, or 4.1 percent, to $25.01. That put Apple's market capitalization at $222 billion compared with $219 billion for Microsoft. Apple is now the No. 2 U.S. company by market capitalization behind Exxon Mobile Corp.
The Russell 2000 index of smaller companies rose 2.60, or 0.4 percent, to 642.62.
Major European indexes snapped back after big losses Tuesday. Britain's FTSE 100 gained 2 percent, Germany's DAX index rose 1.6 percent, and France's CAC-40 climbed 2.3 percent.
Business Writer Stevenson Jacobs contributed to this report.