Investors have been looking to Bernanke, who gave his outlook on the US economy on Thursday, and other policymakers to address a host of concerns from slowing global growth to Europe's debt crisis.

A rise in jobless claims reported earlier in the day underscored the weakness in the US economy and came ahead of a speech by President Barack Obama. Obama is due to speak at 7 p.m. and is expected lay out a plan for creating jobs.

"The Fed hasn't come out with more options or tools that the market wants or was expecting," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. "The market was disappointed because this wasn't a game changer."

Banks were the biggest decliners after sharp gains on Wednesday. They have been one of the most turbulent sectors in the volatility that has engulfed equity markets this summer. The KBW Bank Index fell nearly 3 per cent.

The Dow Jones industrial average dropped 119.05 points, or 1.04 per cent, to 11,295.81. The Standard & Poor's 500 Index fell 12.72 points, or 1.06 per cent, to 1,185.90. The Nasdaq Composite Index lost 19.80 points, or 0.78 per cent, to 2,529.14.

Among bank shares, JPMorgan fell 3.8 per cent to $33.51, the biggest decliner on the Dow. Bank of America Corp fell 3.7 per cent to $7.20. The S&P 500 financial sector index lost 2.3 per cent.

The VIX volatility index, a measure of expected market turbulence, rose 3 per cent to 34.37. Although down from levels seen in August, it is still at elevated levels compared with early in the year.

Volume on the NYSE, the Nasdaq and Amex was 7.15 billion shares, 16 per cent below the 20-day moving average, a sign that participation is weakening after the high volume sell-off in August. About 76 per cent of NYSE shares fell.

The current market conditions mean that short-term views are dominating and company fundamentals are taking a back seat.

"All of a sudden everybody is a trader, now, nobody is an investor," said Sam Ginzburg, a senior trader at First New York Securities. "Everything is trading macro, everything is trading on psychology, and everybody is staring at charts."

The S&P 500 struggled to hold up the 1,200 mark although it broke above that level earlier in the day, which could mark a significant resistance level for the market.

On the upside, Yahoo shares rose 6.1 per cent to $14.44 after a top shareholder, Third Point LLC, demanded that Yahoo overhaul its board of directors.

Shares of SanDisk Corp, a flash memory maker, jumped 2.4 per cent to $38.52.

Separately, the government said the US trade deficit narrowed considerably in July, a positive signal for economic growth in the third quarter after a sluggish first half.