US STOCKS-Market's 3 percent fall suggests deepening worry

* Investors fret over gov'ts' failure to find solutions

* S&P bounces off key support

* CBOE Volatility Index jumps more than 10 pct

* Indexes down: Dow 3.5 pct, S&P 3.2 pct, Nasdaq 3.3 pct

* For up-to-the-minute market news see [STXNEWS/US]
(Updates volume, options data)

By Chuck Mikolajczak

NEW YORK, Sept 22 (Reuters) - U.S. stocks plunged on
Thursday, extending a selloff to four days, as policymakers'
failure to arrest global economic stagnation sent markets
spiraling downward.

The heavy volume of Thursday's plunge signaled investors
are selling in anticipation of more losses. Wall Street's "fear
gauge," the CBOE Volatility Index .VIX, jumped 12 percent,
giving the index its biggest 2-day percentage spike in a month
as investors protected against more losses to come.

Energy and materials shares were among the hardest hit
areas on worries of slowing worldwide demand. Signs of a
slowdown in China fed those fears.

"It's tough to find anything that is a positive catalyst
for the market, either domestically or internationally," said
TD Ameritrade Chief Derivatives Strategist J.J. Kinahan.

The Dow Jones industrial average .DJI dropped 391.01
points, or 3.51 percent, to 10,733.83. The Standard & Poor's
500 Index .SPX lost 37.20 points, or 3.19 percent, to
1,129.56. The Nasdaq Composite Index .IXIC slid 82.52 points,
or 3.25 percent, to 2,455.67.

Weak data from China followed an unsettling outlook about
the U.S. economy from the Federal Reserve on Wednesday in
stoking recession fears. The previous session's losses were
sparked after the Fed said it saw "significant downside risks"
facing the economy. [ID:nS1E78K1V1] [FED/AHEAD]

China's once-booming manufacturing sector contracted for a
third consecutive month, while the euro zone's dominant service
sector shrank in September for the first time in two years.
[ID:nL5E7KM1AQ]

Those searching for positive market signs could point to
the benchmark S&P 500 index holding above 1,120, seen as a key
technical support level which could trigger more selling if
broken.

"We haven't seen the market completely tilt just yet, so
that does show there is some resilience. There is some fresh
capital on the sideline and people aren't necessarily hitting
the panic button," said Joseph Greco, managing director at
Meridian Equity Partners in New York.

"If we tested 1,100 -- that is where we could see a really
sharp decline from there."

Volume of about 13.24 billion shares traded on the New York
Stock Exchange, NYSE Amex and Nasdaq was well above the daily
average of 7.8 billion and the highest since Aug. 10.

U.S. crude crude oil futures tumbled more than 6 percent,
the biggest one-day percentage drop in six weeks. For details,
see [O/R]

The PHLX oil service sector index .OSX tumbled 6.6.
Schlumberger (SLB.N) slid 6 percent to 61.22. The S&P materials
index .GSPM fell 5.5 percent, with miner Freeport-McMoRan
Copper & Gold Inc (FCX.N) off 9.7 percent to $32.14.

Banks also lost ground with the KBW bank index .BKX off
2.7. Citigroup (C.N) shares were down 6.1 percent to $23.96.
The Fed's plan to lower long-term rates will compress margins
for banks that borrow at short-term rates and lend at
longer-term rates. The declines also came a day after Moody's
cut debt ratings for big lenders. [nS1E78K24A]

FedEx Corp (FDX.N), considered to be an economic
bellwether, slumped 8.2 percent to $66.58 after the world's No.
2 package delivery company pared its outlook for the full year.
For details, see [ID:nS1E78L03W].

In addition to the statement on Wednesday, the U.S. central
bank detailed additional stimulus measures to help push down
long-term rates. Investors worried the latest plan would have
little effect on lending and that there appeared to be few
solutions to sluggish worldwide demand.

Near the close, traders exchanged about 1.10 million option
contracts in the S&P 500 Index as 2.69 puts were in play for
each call, according to Trade Alert. That put-to-call ratio was
higher than the 22-day moving average of 1.77.

Declining stocks outnumbered advancing ones on the NYSE by
2,724 to 343, while on the Nasdaq, decliners beat advancers
2,230 to 353.
(Reporting by Chuck Mikolajczak, Additional reporting by Doris
Frankel; Editing by Kenneth Barry)