WALL Street has again succumbed to a disheartening reality - the recession is taking a heavy toll on US companies.

Stocks closed sharply lower yesterday on more bad news about earnings and ever-increasing worries about the banking industry. The major indexes, which plunged and then soared the first two trading days of the week, ratcheted up and down during the course of the session; the Dow Jones industrial average fell as much 271 points, came close to breaking even and then slumped before closing down 105.

"We're seeing a little bit of increase in volatility because things have not gotten much better," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group.

Microsoft Corp set the tone for the day and made clear more pain was to come before an elusive economic recovery would emerge. The company surprised investors yesterday morning by reporting its fiscal second-quarter earnings early - and the news was not good. The software giant posted an 11 percent drop in profit and said it will slash 5,000 jobs over the next 18 months.

Microsoft said deteriorating global economic conditions and lower revenue from PC software forced it to cut back. The company also said it is unable to provide any profit and revenue forecasts for the rest of the year because of the market volatility.

Uneasiness about financial companies still plagues investors, and many bank stocks took another beating yesterday. Quarterly financial reports showing steep profit declines and big loan losses have investors worried that the financial crisis is far from over, and that the government's efforts to prop up banks might not be enough to prevent a major failure.

Bank of America Corp said former Merrill Lynch & Co Chief Executive John Thain resigned after a meeting of Bank of America executives yesterday morning. The company didn't offer a reason for Thain's departure, but it follows news that Merrill Lynch had moved up its year-end bonuses, handing out payments just days before it was officially acquired by Bank of America on Jan. 1. Moreover, some analysts expected that Thain would leave; it's almost inevitable that in the marriage of two big companies, one of the former CEOs leaves soon after the deal is closed. Bank of America fell 15 percent.

More downbeat economic readings, including an increase in the number of weekly jobless benefit claims and a sharp drop in home construction activity, added to the day's gloom.

Investors found some encouragement after two House committees prepared President Barack Obama's economic stimulus plan for a floor vote next week. Still, there were still clear signs that it wasn't gaining as much Republican support as the new administration had been hoping for.

The Dow fell 105.30, or 1.28 percent, to 8,122.80.

Broader market indexes recovered some of their losses but still showed big drops. The Standard & Poor's 500 index fell 12.74, or 1.52 percent, to 827.50. The technology-heavy Nasdaq composite index dropped 41.58, or 2.76 percent, to 1,465.49 after the Microsoft news.

The Russell 2000 index of smaller companies fell 13.91, or 3.05 percent, to 442.85.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange where volume came to 1.56 billion shares.

Bond prices mostly fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.60 percent from 2.55 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, was flat at 0.10 percent from late Wednesday.

The Dow jumped 3.5 percent Wednesday amid a rally in the battered banking industry, stronger-than-expected results from IBM Corp and hopes of swift action in Washington to help the economy. Those gains came just a day after the Dow tumbled 4 percent on worries governments would further intervene to help struggling banks.

"The increased volatility is not a good sign," said Bruce McCain, chief investment strategist at Key Private Bank. He said fractiousness should gradually decrease as the market progresses in the sometimes long process of finding a bottom. The market's ups and downs this week could indicate that it will take longer for Wall Street to find the level where stock prices are priced appropriately.

Double-digit moves in bank stocks have been tugging at the entire market and making investors leery of placing big bets anywhere with so many questions remaining about how banks will deal with bad assets and resume more normal levels of lending.

"There are still problems at some of the banks, which is evident by their stock price deteriorating, which is overhanging the whole economy," Fullman said. "We need to see that there's confidence in the banks. They're a crucial piece to most businesses and they're a crucial part of the economy."

Banks like Citigroup Inc and Bank of America have announced losses in the billions of dollars but it's not just big banks that are troubled. Regional bank Fifth Third Bancorp spooked investors yesterday with its report that it lost almost US$2.2 billion in the fourth quarter in part because of bad loans. The stock of the Cincinnati bank plunged 29 percent.

Even further government aid for banks from the government's US$700 billion financial rescue fund could present risks for shareholders, as well as taxpayers. Bank investors could see the value of their holdings tumble if the government were to take a big stake in a company. That's because banks have been issuing shares to the government in exchange for much-needed cash. With so many more overall shares in the marketplace, each one is worth less.

The biggest decliners among financial stocks yesterday included Bank of America, which tumbled 97 cents, or 14.5 percent, to US$5.71, and Citigroup Inc, which dove 56 cents, or 15 percent, to US$3.11.

Tech shares took a hit following Microsoft's report, though computer and electronic gadget maker Apple Inc reported fiscal first-quarter profit and revenue that topped analysts' projections.

Microsoft dropped US$2.27, or 12 percent, to US$17.11, while Apple gained US$5.53, or 6.7 percent, to US$88.36.