NEW YORK (CNNMoney.com) -- Wall Street slumped Thursday, with the S&P 500 plunging to an 11-1/2 year low as fears of a prolonged recession sparked a massive selloff.

Treasury prices rallied as investors sought the comparative safety of government debt. The dollar was mixed versus other major currencies. Oil prices plunged

The Standard & Poor's 500 (SPX) index lost 6.7% and closed at its lowest point sine April 14, 1997.

The Dow Jones industrial average tumbled (INDU) 5.6% and the Nasdaq composite (COMP) slumped 5.1%. Both the Dow and Nasdaq closed at their lowest points since March 12, 2003, which was just above the low of the last bear market.

The Dow has lost 872 points, or 10.4%, over the last two sessions. It saw a bigger two-day point drop in the two sessions after the presidential election, but it hadn't seen either two-day percentage drops since October 1987, according to Dow Jones.

Stocks slipped through the early afternoon following miserable readings on the labor market and manufacturing sector. The major gauges briefly bounced after hitting fresh 5-1/2 year lows. But the recovery attempt dissolved as Congress haggled over the fate of the automakers and Citigroup led the bank stocks sharply lower.

"It was pretty brutal," said Phil Orlando, chief equity market strategist at Federated Investors.

He said the market is at a critical point, with the S&P having "tested" or closed below the lows of the previous bear market. Investors will be looking closely at the next few sessions to see if stocks can hold those key levels.

Since peaking at an all-time closing high of 1,565.15 on Oct. 9, 2007, the S&P 500 has lost 52%. The Dow has lost nearly 47% since closing at an all-time high of 14,164.53 on the same day. Since hitting a bull market high of 2,859.12 on Oct. 31, 2007, the Nasdaq has lost 54%.

"The wealth destruction is phenomenal," said Tom Schrader, managing director at Stifel Nicolaus.

Orlando said that the economic news Thursday morning and over the last few months has been pretty uniformly dreadful. Investors are looking at probably three consecutive quarters of negative GDP growth, from the third quarter of this year through the first quarter of next. The current quarter, the fourth, is expected to be the worst.

"We're going to hit an inflection point where the economy improves, but no one believes it yet," Orlando said.

He said that typically in a recession, the stock market bottoms when it perceives the slowdown is about halfway or three-quarters of the way through. Investors decided they've had enough and start pushing stocks higher before the news improves. But this time around, investors will need to see the evidence first.

In the week ended Wed. Nov. 19, investors pulled roughly $19.5 billion out of equity mutual funds, according to tracking friim Trim Tabs. In the previous week, invesotrs pulled $31.8 billion out of funds. Investors have now cashed out of funds in 16 of the last 17 weeks.

After the close Thursday, Dell (DELL, Fortune 500) reported better-than-expected earnings and worse-than-expected revenue. (Full story)

Also after the close, Gap (GPS, Fortune 500) reported higher quarterly earnings that edged past analysts' estimates on weaker revenue that missed estimates. Shares gained 3.5% after the close.

Automakers: The Senate called off a vote on a proposed $25 billion bailout package for the industry due to lack of support. Democratic leaders have said that the Senate will return in December to discuss a package if the automakers can show how the money would enable them to turn their business around.

The top executives of Chrysler, GM (GM, Fortune 500) and Ford Motor (F, Fortune 500) have been on Capitol Hill all week making the case for additional government support to stay afloat. But critics say the companies would be better served by declaring bankruptcy, restructuring and reemerging.

GM shares bounced Thursday afternoon after hitting the lowest level since the Great Depression. Ford Motor shares also bounced after hitting lows.

On Thursday, General Motors' finance arm GMAC said it has filed to become a bank holding company, in a bid to tap into the $700 billion bank bailout.

GM was the only Dow component to advance in Thursday's session.

Citigroup: The company's largest shareholder, Saudi Prince Alwaleed Bin Talal, said Thursday that he is increasing his stake in the troubled bank back to 5% from 4%, even as shares continue to plummet. Citigroup (C, Fortune 500) shares plunged 26.4%.

The move follows the U.S. government's decision to inject $25 billion into the bank. Earlier this week, Citi said it was cutting over 50,000 of its staff as a means of cutting costs heading into what is expected to be a rough 2009.

Sources said Thursday that Citigroup officials are lobbying the SEC to reinstate the ban on the short selling of financial shares, the Wall Street Journal reported.

In other corporate news, General Electric (GE, Fortune 500) denied it is looking for money from sovereign wealth funds or other funds. Shares fell 11%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than ten to one on volume of 2.23 billion shares. On the Nasdaq, decliners topped advancers by five to one on volume of 3.20 billion shares.

Economy: The number of Americans filing new claims for unemployment jumped last week to 542,000, the highest level in 16 years, the government reported. The number of people continuing to collect unemployment benefits neared a 26-year high.

The index of leading economic indicators (LEI), fell by 0.8% in October, after gaining a revised 0.1% in September. Economists thought the Conference Board report would fall by 0.6%.

The November Philadelphia Fed index, a regional read on manufacturing, fell to negative 39.3 from negative 37.5 in October. Economists expected a reading of negative 35.

The economy is widely considered to be in recession, despite the lack of an official declaration by the government or the research group that calls economic cycles.

Speaking in the afternoon, Treasury Secretary Henry Paulson said that the current financial crisis is something only seen once or twice in a century. However, he also cautioned against imposing too-strict rules to prevent it from happening again.

Other markets: Markets worldwide declined. Asian stocks tumbled, with the Japanese Nikkei losing 6.9%. European stocks tumbled, with London's FTSE 100 down 3.3% and the German DAX down 3.1%.

U.S. light crude oil for December delivery fell $4.77 to settle at $49.62 a barrel on the New York Mercantile Exchange,

Gasoline prices dipped another 2.7 cents to a national average of $2.02 a gallon, according to a survey of credit-card activity released Thursday by motorist group AAA. Prices have been declining for more than two months. During that time, prices have dropped by $1.84 a gallon, or over 52%.

The dollar fell versus the euro and gained against the yen.

COMEX gold for December delivery rose $12.70 to settle at $748.70 an ounce.

Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to a five-year low of 3.14%, down from 3.33% late Wednesday. The yield on the 2-year fell to a record low below 1%.Treasury prices and yields move in opposite directions. (Full story)

The yield on the 3-month Treasury bill briefly fell to 0.00%, a nearly 68-year low, before bouncing back to 0.015%. The 3-month - seen as the safest place to put money in the short term - last hit these levels in September as investor panic peaked. The low yield means nervous investors would rather preserve their money despite little or no interest rather than risk the stock market.

Borrowing rates were slightly improved. The 3-month Libor rate fell to 2.15% from 2.17% Wednesday, while overnight Libor was unchanged at 0.44%, according to Bloomberg.com. Libor is a key bank lending rate.