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Dow closes down more than 260 points

American flags fly in front of the New

American flags fly in front of the New York Stock Exchange on Feb. 10, 2011. Credit: AP

Technology companies lead a broad drop in U.S. stocks that tugged the Dow Jones industrial average down more than 260 Thursday. Apple closed down about 3.8 percent after the company pulled a software update for its iPhones because users complained that they weren't able to make calls after downloading it.

At the close on Wall Street, Dow had lost 264.26 points, or 1.54 percent, to 16,945.80. The Standard & Poor's 500 index fell 32.31 points, or 1.62 percent, to 1,965.99, and the Nasdaq composite dropped 88.47 points, or 1.94 percent, to 4,466.75.

Tech stocks also fell the most among the 10 industries in the S&P 500 index. The declines were broad: 97 percent of the stocks in the S&P 500 index traded lower. If those losses hold, it will be the S&P 500's biggest one-day drop since July 31.

WHOOPS: Late Wednesday, Apple announced that it had pulled a software update that prevented users from making phone calls. Others complained that they bent their new iPhones by sitting on them. Apple dropped $3.88, or 3.81 percent, to $97.87 in heavy trading.

GETTING BUMPY: Trading has turned turbulent this week, marking an abrupt break from a sleepy summer. On Monday, concerns about slowing growth in China and falling U.S. home sales knocked the market back, giving the S&P 500 its worst daily drop in more than a month. On Wednesday, the S&P 500 had its best gain in more than a month.

NEW NORMAL? Henry Smith, chief investment officer at Haverford Trust, said there was no fundamental reason behind the big drop on Thursday. A sudden turn might seem alarming because it's so unusual. "We've really had such little volatility for the past couple of years," he said. "Now when we have a 200-point drop in the Dow, it feels like something is really wrong."

ECONOMY: Claims for unemployment benefits crept up last week. The Labor Department said Thursday that 293,000 people applied for benefits, but that was slightly lower than economists' forecasts. The less volatile four-week average fell for the second straight week to 298,500. A separate report said businesses orders for equipment plunged last month, mainly a result of a drop in orders for commercial aircraft.

REACTION: "The economic numbers were negative, but not alarming and don't change the direction of the economy at this time," said Peter Cardillo, chief market economist at Rockwell Global Financial. "We're down rather sharply and it looks like we're giving up all of the gains we made yesterday," he said. "It's one step forward and one step back."

BIG ONE: Some investment analysts have been warning that the market is long past due for a 10 percent drop, known as a "correction." Since World War II, they typically hit every 18 months, according to S&P Capital IQ. There hasn't been one since August 2011.

"Big pullbacks are normal in a bull market," said Smith. "What's abnormal is that we've gone three years without one."

FURTHER CLUES: Investors have been looking at economic reports for any signs that the improving economy could lead the Federal Reserve to start raising interest rates. Next week, further clues will emerge from a several key pieces of data, including the job market report for September.

ONE VIEW: "The existence of major fundamental risks next week means that there is some caution ahead with many unsure of the direction that markets should be heading," said Joshua Mahony, research analyst at Alpari.

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