Dow slides on debt fears (ext)

NEW YORK (CNNMoney) -- Stocks retreated deep into negative territory on Wednesday as Congress remained stalled on resolving the debt ceiling, and an economic report showed a significant slowdown in the U.S. manufacturing sector.

The Dow has now fallen four days in a row as investors grow increasingly worried that Washington won't solve the the country's budget woes in time to meet the August 2 debt ceiling deadline.

The Dow Jones industrial average (INDU) sank 199 points, or 1.6%, to close at 12,303.

The S&P 500 (SPX) lost 27 points, or 2.1%, to 1,305 and the Nasdaq Composite (COMP) fell 75 points, or 2.7%, or 2,765. The tech-heavy Nasdaq was dragged lower by Cisco (CSCO, Fortune 500), which fell 4%, and Research in Motion (RIMM), falling 6%.

"Take the uncertainty over the debt ceiling and add the weak economic data, that's not going to help the market's performance," said Michael James, senior equity trader at Wedbush Morgan Securities. "Investors are in selling mode."

Washington's debt ceiling negotiations remain stagnant. House Speaker John Boehner said late Tuesday he will rewrite his debt legislation, after the Congressional Budget Office (CBO) said the bill would reduce deficits by only $851 billion over 10 years.

The CBO said Wednesday a competing proposal from Senate Majority Leader Harry Reid would save $2.2 trillion over a decade -- less than the $2.7 trillion Reid said the bill would save.

"A rating agency downgrade of the U.S.' credit rating is inevitable at this point, I believe," said Jack Ablin, chief investment officer at Harris Private Bank.

The two competing proposals give investors little comfort that Congress is any closer to reaching an agreement, with only six days left before the Aug. 2 deadline.

Ablin said he expects the debt ceiling will get raised, but investors should get used to the possibility that the U.S. will likely no longer have a "AAA" rating.

"What we're looking at is Washington's inability to solve the big problems as compared to other countries that have done a much better job of addressing these issues," he said.

The dollar strengthened against the euro and British pound, but weakened against the Japanese yen.

Gold futures for August delivery hit a new intraday trading record of $1,625.80 an ounce early Wednesday before retreating to $1,615.10 an ounce, down $1.70 from Tuesday's levels.

Oil for September delivery slipped $2.20 to $97.40 a barrel.