NEW YORK (AP) — Stocks slumped for a second straight day yesterday as investors, already on edge about the worsening economy, were further rattled by a report that Washington's plans to help banks may have hit a snag.

The Dow Jones industrials dropped 4.5 percent over two sessions; broader stock indexes are down more than 5 percent since Wednesday.

Uncertainty about when the economy will improve has investors looking to Washington for answers. With the market particularly worried about the prospects of a big bank failure, investors have been hopeful that the government will soon release details of a wide-reaching plan to help banks rid themselves of their toxic assets. But a CNBC report late yesterday cast doubt on the so-called 'bad bank' idea, citing an unnamed industry source as saying the plan has hit significant snags. The news sent stocks down sharply lower in late afternoon trading.

"People were hoping it was coming sooner rather than later," said Anton Schutz, portfolio manager of the Burnham Financial Industries Fund and the Burnham Financial Services Fund. "So many people were anticipating good announcements about the bad bank over the weekend, but now not expecting any good news."

Treasury Secretary Timothy Geithner was meeting yesterday with top government officials to develop the administration's plan for overhauling the $700 billion bailout programme and improve regulation of the financial system.

Earlier in the day, investors found little solace in a milder-than-expected report on fourth-quarter economic activity. In fact, the report only heightened concerns that the economy is worsening.

Gross domestic product, the widely followed measure of the economy, shrank at a 3.8 percent pace in the final three months of 2008, the Commerce Department reported. That compared with a 0.5 percent decline the previous quarter.

Yesterday's reading was much better than the 5.4 percent drop economists expected. But many analysts suspect the economy is shrinking at an even faster pace in the first quarter. Weak earnings reports and rising job losses are helping to solidify that belief.

"We expected the fourth quarter to be the worst of the recession," said Randy Frederick, director of trading and derivatives at Charles Schwab. "From an investor's perspective, they may see this stronger-than-expected report setting us up for the first quarter to be worse.

"Each time you get a report that indicates that maybe we hadn't bottomed out yet, it prolongs the recovery."

The Dow Jones industrial average fell 148.55, or 1.82 percent, to 8,000.46. The Standard & Poor's 500 index fell 19.26, or 2.28 percent, to 825.88, and the Nasdaq composite index fell 31.42, or 2.08 percent, to 1,476.42.

The Russell 2000 index of smaller companies fell 9.71, or 2.14 percent, to 443.53.

Declining issues outnumbered advancers by three to one on the New York Stock Exchange, where volume came to 1.51 billion shares.

Volatility has been high this week, with the market zig-zagging on a mix of earnings and economic news as investors try to determine what the rest of 2009 will bring.

On Thursday, the Dow sank 226 points, while other indicators tumbled more than three percent, on news that unemployment claims reached a record high and that new home sales hit a record low. This erased all of the gains from the previous day, when stocks soared on hopes that the government will take bad debt off banks' books.

Yesterday's corporate earnings reports were anything but encouraging.

Evidence that consumers are cutting back on even the most basic of items came as Procter & Gamble Co. said sales in the fourth quarter dipped three percent on weakening demand for its products — which include Tide detergent, Olay skin cream and Crest toothpaste. The company also lowered its earnings projections for the full year, and said it expects sales to fall in the current quarter.

Meanwhile, two of the country's largest oil companies reported feeling the pain of sinking oil prices. Exxon Mobil Corp. said that it surpassed its own record for annual earnings by a US company last year, but saw a big drop in profit during the fourth quarter. Chevron Corp.'s fourth-quarter results also suffered from the late-2008 plunge in oil prices.

Honda Motor Co. slashed its 2009 profit target by more than half as its earnings dropped 90 percent in the latest quarter.

Also yesterday, Japanese electronics maker NEC Corp. said it will cut 20,000 jobs worldwide as it reported a $1.46 billion loss for the fourth quarter.