US stocks fell in volatile trading on Thursday morning after industrial production data showed a fall of 2.8 per cent, the biggest since 1974. Declines follow stocks' worst sell-off since 1987.

Financials led the declines, down 5.2 per cent. Citigroup (NYSE: C - News) rose as much as 4 per cent but later tumbled to stand 7.1 per cent lower at $15.08 as investors weighed cost-cutting progress with writedowns of $4.4bn in the securities and banking division and weak revenues from its credit card unit.

Merrill Lynch fell 5.7 per cent to $16.21 after the bank, which is being taken over by the Bank of America, reported a worse-than-expected third-quarter net loss of $7.5bn, largely due to to writedowns and credit losses on complex debt securities.

Weighing on sentiment, industrial production posted the biggest monthly decline since 1974, which Morgan Stanley said was "drastically weaker than expected", while mid-Atlantic regional factory activity crashed to an 18-year low.

In separate economic news, consumer prices were flat in September, while the number of workers filing new claims for unemployment benefits fell a second-straight time last week due in part to the reduced effect of Hurricanes Ike and Gustav.

By mid-morning in New York S&P 500 was down 0.7 per cent at $5.87 while the Dow Jones Industrial Average was down 0.7 per cent at 8,512.23, nearing Friday's closing lows. The technology-heavy Nasdaq Composite Index was down 1.8 per cent at 1,233.25.

An easing in the rates at which banks lend to each other had earlier helped improve the mood and the S&P rose as much as 1.9 per cent only to fall later in the session.

Overnight dollar Libor fell from 2.14375 per cent to 1.9375 per cent, closer to the Fed funds target rate of 1.5 per cent, while three-month dollar Libor eased from 4.55 per cent to 4.5025 per cent.

A host of regional banks also reported on Thursday. Bank of New York Mellon fell 1.8 per cent to $28 after costs to bail out funds affected by Lehman Brothers's bankruptcy hurt third-quarter profit, which plunged more than expected.

Huntington and BB&T added 0.2 per cent to $29.31, lost 4.1 per cent to $8.25 and eased 0.6 per cent to $31.97, respectively.

Elsewhere, airlines posted gains even after Southwest reported its first quarterly net loss since 1991. It added 3.1 per cent to $11.92 while Delta rose 3.9 per cent to $7.73.

In energy, which was the biggest drag on the S&P in the previous session, Peabody Energy was the index's biggest winner, up 20.4 per cent to $29.19 on the back of well-received third-quarter figures.

Technology was the second biggest sectoral laggard, down 2.9 per cent overall. Ebay fell 7.7 per cent after the online retailers forecast its first quarterly sales decline after the bell on Wednesday.

Google lost 6.6 per cent to $30.70 ahead of results later on Thursday.