(By Salman - iStockAnalyst Writer)

US stocks once again plunged on Thursday, extending its slide to seventh day as recession fears and credit worries continued to persist. A sharp drop in the shares of carmakers, financials, insurers and energy companies weighed heavily upon the markets.

The Dow Jones Industrial Average tumbled 678.91 points, (-7.33%), to finish at 8,579.19. The S&P 500 shrank 75.02 points (-7.62%), to 909.92. The Nasdaq Composite lost 95.21 points, (-5.47%), to end at 1,645.12.

Earlier, indices advanced briefly in opening trade on positive initial claims figure and technology stocks’ gains. However, market erased all of its gains and finished deep in red on a day which also saw the return of short sellers. Short selling ban, imposed by SEC came to an end on Wednesday at midnight.  

General Motors (GM) plunged $2.15 or 31.1% to $4.76 after Standard and Poor's Ratings Services threatened to downgrade GM and its finance affiliate GMAC LLC. Both GM and GMAC LLC have been put under review by Standard and Poor’s. The stock is currently trading at its lowest level in last 58 years on fears that a recession will seriously hit the demand for cars.

Ford Motor Co. (F) lost 21.8%.

Among the financials, shares of Morgan Stanley ( MS) finished down $4.35 or 25.89% to $12.45. Citigroup Inc. (C) skidded 10.21%. Wachovia Corp.(WB) lost 28.85%.

In a latest move, late on Thursday, Citigroup Inc. announced that it is pulling out of bid for Wachovia. The bank also said that it is ending court efforts to block the merger agreement between Wachovia and Wells Fargo.

However, Citigroup made it clear that it would still seek breach of contract damages from the two banks. The bank said in a statement, "Citi believes that it has strong legal claims against Wachovia, Wells Fargo and their officers, directors, advisors and others for breach of contract and for tortious interference with contract". In after hour trades, shares of Wachovia Corp surged 30%

Among insurance stocks, Prudential Financial Inc. (PRU) slumped 23.15%. American International Group Inc. (AIG) subtracted 25.08%. The insurer announced yesterday that it is borrowing additional funds from Federal Reserve. Under the program, the New York Federal Reserve Bank will provide $37.8 billion in additional cash to certain domestic life insurance subsidiaries of AIG (AIG) in return for investment-grade, fixed-income securities. AIG already has an $85 billion line of credit with the Fed.

Energy Stocks too drifted lower. Exxon Mobil Corp. (XOM) fell $9 or 11.69% to $68.  Chevron Corp. (CVX) dropped 12.45%.

Big Blue IBM (IBM), which was earlier trading in green on strong earnings, gave away its gains in late session, pulling down other technology stocks.  Shares of IBM retreated 1.71%. Microsoft shed 3.09%, Yahoo (YHOO) was down 8.07%, while HP (HPQ) lost 3.75%. Shares of Apple Inc. (AAPL), Google (GOOG) and Dell (DELL) also finished in negative territory.

According to reports, Bush administration is considering taking ownership stakes in certain U.S. banks in order to contain credit crisis and restore investor confidence. Yesterday, in a speech Treasury Secretary Henry Paulson warned of more bank failures. The Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. will "use all their authorities to promote the process of repair and recovery and to contain risks to the financial system that might arise from problems at individual institutions", Paulson said further.

Money markets remained frozen on Thursday. The British Bankers' Association announced on Thursday that the London interbank offered rate, or LIBOR, for three-month loans gained 23 basis points to 4.75%. The Libor-OIS spread, jumped to a record 350 basis points.

According to a release by Department of Labor, Weekly Jobless Claims for the week ending October 4 fell by 20,000 to 478,000, from the previous seven year high of 498,000. A Census Bureau Release today showed that the Wholesale Inventories increased 0.8% in the month of August to $445.4 billion, double the forecast of 0.4%.

European stocks settled lower on Thursday. U.K. FTSE retreated 52.89 points (-1.21%) to 4,313.80. The German DAX subtracted and French CAC subtracted 2.53% and 1.55% respectively.

Among Asian stocks, Nikkei 225 finished relatively flat at 9,157.49, down 45.83 points or 0.5%.

On Thursday, NYMEX Crude oil for November delivery settled at $86.59, down $2.36 (-2.7%).

Disclosure: Author does not own any of the stocks discussed here.