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NEW YORK (Reuters) - Stocks fell on Thursday as investors raised cash ahead of a critical speech from Fed Chairman Ben Bernanke, hoping he will give them a clearer picture of the Fed's plans for the struggling economy.
Several negatives contributed to the market's weakness after three days of gains. Jitters over a sharp drop in German stocks and a report showing continued U.S. job market weakness helped fuel the selling.
Stocks rose earlier this week, partly on expectation the soft U.S. economy could trigger another round of monetary stimulus from the Federal Reserve, much like the one suggested by Bernanke at the same conference in Jackson Hole, Wyoming, a year ago.
"There is an assumption there is not going to be an announcement on monetary policy, but the market set up this week like that was the case," said Art Hogan, managing director of Lazard Capital Markets in New York.
"There seems to be a bit of a dichotomy from what people are saying to what they are doing."
Bernanke, who is scheduled to speak on Friday at 10 a.m. EDT, is most likely to outline gradualist measures, which would disappoint those looking for dramatic action, such as a fresh round of asset purchases.
Stocks opened higher after Bank of America (BAC.N) said Warren Buffett's Berkshire Hathaway (BRKa.N)(BRKb.N) would be taking a $5 billion stake in the bank, whose shares had fallen to two-year lows earlier this week.
"We had some upbeat emotion at the open with Warren Buffett's investment in Bank of America but that fizzled very quickly when we looked across the pond and saw what was going on with German markets," said Hogan.
The S&P 500 is still up 3.2 percent so far this week, which could be the first positive one for the benchmark index in the past five.
The Dow Jones industrial average .DJI dropped 170.89 points, or 1.51 percent, to 11,149.82. The Standard & Poor's 500 Index .SPX fell 18.33 points, or 1.56 percent, to 1,159.27. The Nasdaq Composite Index .IXIC lost 48.06 points, or 1.95 percent, to 2,419.63.
Volume has decreased from the frenzied first three weeks of August. Major averages have stabilized, with 1,120 on the S&P 500 now viewed as a key support level, but it remains to be seen whether stocks can gather enough steam for an extended rally.
"I think a lot of what's been happening in the market is positioning or repositioning for different events," said Doreen Mogavero, CEO of Mogavero, Lee & Co in New York. "I'm not sure how much of it is real investing."
Bank of America gained 9.4 percent to $7.65 in trading of more than 855 million shares, or almost 10 percent of total composite volume on the day.
Citigroup (C.N) gained 4.9 percent to $29.03, but Buffett's investment did not entice buying across the banking sector, and the KBW bank index .BKX shed 0.2 percent.
The S&P financials index .GSPF, which had been the only S&P sector in positive territory earlier in the session, declined 0.46 percent. The index had earlier climbed as much as 4.7 percent.
Apple Inc (AAPL.O) fell 0.65 percent to $373.72 on the first trading day after news that co-founder Steve Jobs resigned as chief executive.
About 8.9 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the year-to-date average of 7.9 billion but below the 11.2 billion average so far in August.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 16 to 5, while on the Nasdaq, more than four stocks fell for every one that rose.
The European benchmark FTSEurofirst 300 index .FTEU3 fell 1.3 percent and Germany's DAX .GDAXI dropped as much as 5 percent before closing down 1.7 percent on talk Germany could enact a short-selling ban following the example of other European nations. A German government spokesman said there were no plans for a general short-selling ban.
Reporting by Rodrigo Campos; Editing by Kenneth Barry