Fed steps in but US stocks plunge again

US stocks fell sharply as investors remained unconvinced that new lending avenues created by the Federal Reserve would unblock credit to the struggling US economy.

US stocks fell sharply again on Tuesday as investors remained unconvinced that new lending avenues created by the Federal Reserve would unblock credit to the struggling US economy.

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The three major stock indices each fell more than 5 per cent. The Dow Jones Industrial Average fell more than 500 points and the broader S&P 500 dropped below 1,000 points for the first time in five years.

The Federal Reserve announced it would begin lending directly to non-financial companies by buying up commercial paper in an effort to thaw a credit freeze that has gripped the world's largest economy.

Fed Chairman Ben Bernanke suggested the central bank would lower interest rates at its upcoming meeting at the end of October.

The International Monetary Fund in a financial report on Tuesday forecast banks and lenders would lose $1.4 trillion before the credit crisis comes to an end.

The blue-chip Dow fell 508.39 points, or 5.11 per cent, to 9,447.11. The broad-based Standard and Poor's 500 lost 60.66 points, or 5.74 per cent, to 996.23. The high-tech Nasdaq Composite index shed 108.08 points, or 5.8 per cent, to 1,754.88.