Stomach-wrenching volatility is back

Stocks tumbled Thursday afternoon as Microsoft's earnings miss and job cuts and John Thain's departure from Bank of America - exacerbated fears about the depth and duration of the recession.

The Dow Jones industrial average (INDU) fell 220 points or 2.7%, with roughly 3-1/4 hours left in the session. The Standard & Poor's 500 (SPX) index tumbled 22 points or 2.7% and the Nasdaq composite (COMP) lost 52 points or 3.5%.

Stocks slumped Tuesday on banking woes, rallied Wednesday on IBM's earnings and bouncing bank stocks and then sold off again Thursday.

"We're back to the volatility levels we saw in November, where it's up 250 one day, down 250 the next, only it's going to feel more dramatic this time because the Dow is at 8,000," said Brian Battle, vice president at Performance Trust Capital Partners.

Battle said that Microsoft's earnings loss and job cuts were a big negative for sentiment because it confirms that the recession is hitting a broad range of industries.

John Thain's departure from Bank of America is adding to nervousness about the leadership at the big banks, Battle said.

Microsoft: The tech leader said it will cut up to 5,000 jobs over the next 18 months due to the impact of the recession. Microsoft (MSFT, Fortune 500) also reported lower fiscal second-quarter earnings that missed estimates on slightly higher revenue that also missed estimates. Shares fell 10%.

Financials: Former Merrill Lynch chief executive John Thain will leave Bank of America, amid criticism of his management of Merrill - purchased by BofA a month ago. The news sent shares of Bank of America (BAC, Fortune 500) down 13%.

Citigroup (C, Fortune 500) said late Wednesday that former Time Warner chairman Richard Parsons has been named its new chairman. Last week, the company announced it was splitting its business in two.

Separately, it was reported that the chief executives of Bank of America and Citigroup bought some company stock last week, according to SEC filings. Yet this failed to reassure investors. Citigroup shares fell 14%.

Aflac (AFL, Fortune 500) shares fell after Morgan Stanley raised worries about its exposure to certain securities issued by hard-hit European financial firms, according to reports. Shares of the insurer lost 30%.

Apple: The company reported higher fiscal first-quarter sales and earnings late Wednesday that topped estimates. Apple (AAPL, Fortune 500) also issued a fiscal second -quarter sales and earnings forecast that was short of analysts' estimates. But investors focused on the earnings and sent shares 7% higher Thursday morning.

Other company news: After the market close Wednesday, eBay (EBAY, Fortune 500) reported a lower fourth-quarter profit that nonetheless topped estimates. The online auctioneer also issued a current-quarter profit forecast that is short of expectations. Shares fell 12.7% Thursday.

Also late Wednesday, Intel (INTC, Fortune 500) said it was shutting sites in Asia and scaling back U.S. operations in a restructuring move that will affect up to 6,000 people. Shares fell 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 620 million shares. On the Nasdaq, decliners topped advancers four to one on volume of 1.08 billion shares.

Economy: Housing starts and building permits both tumbled to record lows in December, the government reported. Permits fell 10.7% from November to an annual rate of 549,000 in December. Starts fell 15.5% from November to an annual rate of 550,000. The declines were worse than expected, according to a Briefing.com survey of economists.

A separate report showed that weekly claims for unemployment rose to a 26-year high last week, rising 62,000 from the previous week to 589,000. That was a bigger rise than what economists were expecting.

Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 2.60% from 2.52% Wednesday. Treasury prices and yields move in opposite directions. Yields on the 2-year, 10-year and 30-year Treasurys all hit record lows last month.

Lending rates tightened. The 3-month Libor rate increased to 1.16% from 1.12% Wednesday, according to Bloomberg.com. Overnight Libor rose to 0.21% from 0.19% Wednesday. Libor is a bank-to-bank lending rate.

Other markets: The dollar gained against the euro and fell against the yen.

U.S. light crude oil for March delivery fell $2.18 to $41.37 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery rose $4.80 to $856.50 an ounce.

Gasoline prices rose two-tenths of a cent to a national average of $1.85 a gallon, according to a survey of credit-card swipes released Wednesday by motorist group AAA.