NEW YORK — Wall Street plunged Tuesday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow’s biggest percentage drop in almost a year.
The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003.
The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.
“The report drives a nail into the coffin from investors’ minds that we’re in a recession,” said Todd Salamone, director of trading at Schaeffer’s Investment Research. “That doesn’t mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell.”
The ISM said its index of service-sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction. The market had expected another month of growth, and the disappointment contributed to Tuesday’s $500 billion loss in the Dow Jones Wilshire 5000 Composite Index.
Alongside the Labor Department’s report last week showing the first monthly U.S. jobs decline in more than four years, the data on the service sector — which includes restaurants, retailers and banks, among others — was particularly worrisome to investors.
The Dow fell 370.03, or 2.93 percent, to 12,265.13, after dropping 108 points Monday.
The broader Standard & Poor’s 500 index lost 44.18, or 3.20 percent, closing at 1,336.64, while the Nasdaq composite index tumbled 73.28, or 3.08 percent, to 2,309.57.
Asian markets plunged in early trading today, pulled down by Wall Street’s sharp decline. Japan’s benchmark Nikkei 225 index fell 4.13 percent and Hong Kong’s blue-chip Hang Seng Index fell 5.6 percent by midmorning.
In Monday’s and Tuesday’s trading, the Dow gave up most of the gains it made last week, when it jumped 536 points, or 4.39 percent.
