Stocks fell sharply after House Republicans called off a vote on tax rates and left federal budget talks in disarray 10 days before sweeping tax increases and government spending cuts take effect.
Just before 2 p.m. EST, the Dow Jones industrial average was down 141 points at 13,170, a decline of more than 1 percent. The Standard & Poor's 500 index was down 16 points at 1,427. The Nasdaq composite index fell 38 to 3,012.
The House bill would have raised taxes on Americans making at least $1 million per year and locked in decade-old tax cuts for Americans making less. Taxes will rise for almost all Americans on Jan. 1 unless Congress acts.
House Speaker John Boehner had presented what he called "Plan B" while he negotiated with the White House on avoiding the sweeping tax increases and spending cuts, a combination known as the "fiscal cliff."
But Boehner scrapped a vote on the bill Thursday night after it became clear that it did not have enough support in the Republican-led House to secure passage. He called on the White House and the Democratic-led Senate to work something out.
The market's decline demonstrated that investors' nerves are raw as they await a resolution.
"Where we are today, the market would be satisfied with the announcement of a stopgap measure," said Quincy Krosby, a market strategist at Prudential Financial. "The more the clock ticks, the more the market is saying, 'Just give us something.'"
Sal Arnuk, a partner at Themis Trading, suggested that the sharp drop in stocks might have been an overreaction. The Dow was down as much as 189 points, and before the market opened, stock futures suggested a decline of 200 points or more.
"It's not a surprise that they weren't able to come to an agreement," he said. I don't think most of Wall Street anticipated that they would come to an agreement."
Other markets registered their concern, but the reaction was not extreme. The yield on the benchmark 10-year U.S. Treasury note fell 0.05 percentage point to 1.75 percent.
The price of gold, which some investors buy when fear overtakes the market, climbed, but only by 0.6 percent.
If the full "fiscal cliff" takes effect, economists say it could drag the United States into recession next year. The impact would be gradual, though, and a recession is not a sure thing.
Most people would receive only slightly less money in each paycheck. And the tax increases and spending cuts could be retroactively repealed if a deal comes together after Jan. 1.
If budget talks dragged on, many businesses might put off investment or hiring, and consumer spending could suffer. That's why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.
"Believe you me," Krosby said, "if you think that there is a recession in the offing you are going to see this market sell-off. It's sell off first, ask questions later."
Technology stocks were among the hardest hit in early trading. Tech stocks in the S&P 500 were down 0.9 percent as a group. Apple, the most valuable company in the country, fell $6.94 to $514.79.
It was not the first time that Wall Street worried about the "fiscal cliff" talks.
On the day after the election, when voters returned divided government to power, the Dow dropped 312 points. On Nov. 14, when President Barack Obama insisted on higher tax rates for the wealthy, the Dow dropped 185 points.
The sharp drop in stocks Friday was reminiscent of, although much smaller in scale than, what happened Sept. 29, 2008, during the financial crisis.
The House defeated a proposed $700 billion bailout of the U.S. financial industry, and the Dow plunged 777 points, its worst one-day decline. Four days later, the House, shaken by what had happened on Wall Street, passed a modified bill.
Stocks closed sharply lower Friday in Asia after House Republicans canceled their vote. The Nikkei index in Japan fell almost 1 percent, and Hong Kong's Hang Seng Index dropped 0.7 percent. Stocks were also lower in Europe.
Among stocks making big moves:
— Walgreen, the nation's largest drugstore chain, slumped $1.57, or 4.2 percent, to $35.98. It filled fewer prescriptions and absorbed costs tied to acquisitions and Superstorm Sandy. The results were worse than financial analysts had been expecting.
— BlackBerry maker Research in Motion dropped $2.78, or 20 percent, to $11.34. The company said it won't generate as much revenue from telecommunications carriers once it releases the BlackBerry 10.
— Nike, the world's largest maker of athletic gear, jumped $5.66, or 5.7 percent, to $104.66. It said strong demand in North America led to a 7 percent increase in revenue in the three months ended Nov. 30, balancing out economic weakness in Europe and a slowdown in growth in China.
— Micron Technology dropped 8.2 percent, the biggest decline in the S&P 500 index. The semiconductor maker reported a loss late Thursday as weaker demand for personal computers and an oversupply of certain chips hurt its sales. The stock was off 56 cents at $6.23.