New York - US stocks continued dropping through Wednesday, hit by the largest drop of retail sales in three years, growing worry over a US recession and a record federal budget deficit.

The three major US indices shed more than 5 per cent each by 1845 GMT, with the negative momentum dragging down Europe's markets, where Europe's blue-chip Stoxx50 closed 5 per cent down.

US Federal Reserve chief Ben Bernanke warned that the emergency action taken by the Bush administration in response to the financial crisis is unlikely to produce a swift economic recovery.

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," the Fed chief said in a speech to the Economic Club of New York.

The president of the San Francisco branch of the Fed, Janet Yellen, said that the US is already in a recession and that the job of the central bank is to "mitigate the dark scenario on the downside risk."

Economic activity weakened across the United States in September as consumers and businesses became more pessimistic about the economy amid the worsening financial crisis, the Fed said.

The report known as the Beige Book, which is published eight times a year on conditions in the central bank's 12 regions, showed consumer spending and manufacturing had decreased in most areas.

The US government late Tuesday reported a record deficit of 455 billion dollars for the just-ended 2007-08 budget year. The deficit represents 3.2 per cent of the gross domestic product (GDP) of the 14-trillion-dollar US economy, nearly triple the 2006-07 deficit of 161.5 billion dollars and 1.2 per cent of tGDP.

The announcement Tuesday that the US government would follow Europe's example and use 250 billion dollars of a finance rescue package to buy up bank shares failed to stop stocks from sliding, and the decline continued on Wednesday.

The broad-based Standard & Poor's 500 Index declined 63.16 points, or 6.33 per cent, to 934.85. The blue chip Dow Jones Industrial Average retreated 484.02, or 5.20 per cent, to 8,826.97. The Nasdaq high tech index shed 94.41, or 5.31 per cent, to 1,684.60.

The retreat over the past two days erased more than a third of the gains in the S&P 500 and Dow on Monday, when stocks rose the most since the 1930s on the coordinated effort from Europe to stem bank losses and on hints at the US government's plan to buy up bank shares.

Retail sales fell 1.2 per cent in September, almost twice economists' estimates, the US Commerce Department reported Wednesday.

Exxon Mobil, Chevron and ConocoPhillips, the three biggest US oil companies, each lost more than 5 per cent as crude fell below 75 dollars a barrel for the first time since September 2007.

Two finance giants - JPMorgan Chase and Wells Fargo - reported large declines in profits, but still remained in the black.

The third-largest US air carrier Delta Air Lines reported it lost 50 million dollars in the third quarter of 2008 amid rising fuel costs.

On the bright side, Coca-Cola Co, the world's largest soft drink manufacturer, reported a third-quarter profit increase of 14 per cent to 1.9 billion dollars despite the economic downturn. (dpa)