Fearing that the crisis in the financial industry could stun the broader economy, investors drove stocks down almost 5 percent Monday, sending the Dow Jones industrial average and Standard & Poor’s 500-stock index to their lowest levels in two years.

Treasury Secretary Henry M. Paulson Jr. spoke to reporters at the White House on Monday. More Photos »

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The Dow fell 504.48 points, its biggest one-day point drop since Sept. 17, 2001, the first trading day after the Sept. 11 terrorist attacks.

In the minutes before the opening of the New York Stock Exchange, dozens of traders were clustered around the specialists who oversee trading of American International Group and Bank of America, shouting bids and offers. As the opening bell clanged, dozens of flat-panel monitors around the specialists’ posts pulsed with frantic trading.

With Lehman filing for bankruptcy and A.I.G. in distress, investors were worried that consumers and companies would have difficulty getting loans.

The credit markets, in turmoil for more than a year, showed new distress on Monday. Prices of credit default swaps, used by institutional investors for protection from potential bond defaults, rose sharply.

The prices of Treasury bills and notes soared as investors sought safe places to park their capital. Oil prices dropped sharply on Monday, on concerns that demand for energy would shrink as economies slowed down.

The market volatility was likely to continue for some time, economists and strategists said.

“By my own forecasts, it gets worse before it gets better,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

On Tuesday, Goldman Sachs will report its earnings, and the Federal Reserve will decide whether to change short-term interest rates. On Wednesday, Morgan Stanley reports earnings.

“Markets will remain unusually volatile for a period of time,” said Marc Stern, chief investment officer of Bessemer Trust, which manages about $50 billion. “This isn’t a fun period for most investors.”

Financial companies led the plunge Monday, with Goldman Sachs dropping 19 percent and Citigroup falling 15 percent. But stocks that investors view as particularly sensitive to a slower economy, like those of technology companies and manufacturers, were also punished.

On Monday, the Dow closed at 10,917.51, down 4.4 percent. The S.& P. 500 index of the biggest United States public companies fared even worse, falling 59.00 points, or 4.7 percent, to 1,192.69, its lowest close since October 2005.

The crisis on Wall Street caused by the bursting of the real-estate bubble has now lasted 13 months and has caused far more damage than analysts initially forecast.

In the last two months, the chaos has taken a vicious turn, with investors quick to attack any financial company whose balance sheet appears less than pristine. Three of the five biggest American investment banks have failed or been bought since March, and Fannie Mae and Freddie Mac, the giant mortgage companies, were effectively nationalized earlier this month.

Plunging housing prices have also crimped consumer spending and slowed the overall economy, which has lost 700,000 jobs this year. Even so, investors have generally seemed hopeful that the economy would avoid a full-scale recession. Now that confidence may be fading.

Every major sector of the S.& P. 500 fell Monday, with banks and insurers down 10 percent, energy companies down 7 percent, and technology stocks off 4 percent. Health care and consumer staples companies, which are generally viewed as less tied to the overall health of the economy, fell less than 2 percent.

High-yield — or junk — bonds, which are also sensitive to economic weakness, are also facing a sharp drop in economic activity, said Martin Fridson, chief executive of Fridson Investment Advisors, which manages about $240 million in junk bonds. So far this year, the default rate on high-yield bonds is about 4 percent, in line with historical averages.

But a gauge of junk bond prices shows the default rate is likely to more than double over the next 12 months, Mr. Fridson said. And new junk bond issues have also dried up, preventing companies from raising capital, Mr. Fridson said.

Meanwhile, the rates at which banks make loans to each other also rose sharply, a sign that financial institutions feel they must hoard their capital rather than risk lending it and potentially losing it.

Mr. Stern of Bessemer said investors are concerned that the wave of Wall Street failures has not yet peaked. “There’s significant uncertainty about a number of large financial firms, including A.I.G., including Washington Mutual,” he said. “Until there’s resolution on firms of that size, investors are going to be skittish.”

Still, Mr. Stern said he was cautiously optimistic that housing prices might be bottoming in many areas, setting the stage for an eventual floor for the financial sector and the overall stock market.

James Maguire, a managing director at Christopher J. Forbes, a trading firm, said that traders had been shaken by Lehman’s collapse and Merrill’s sudden sale.

“There’s a lot of fear of the unknown,” Mr. Maguire said. “There’s a fear of more financial landmines.”

But outside Wall Street, at least a few individual investors said on Monday they were not afraid to keeping investing.

“This is the time to make money, when people are running off from the market,” said Manabendra Paul, 46, a hotel steward who was visiting a midtown branch of Fidelity Investments.

Investors fled to the security of government debt, bidding up the benchmark 10-year Treasury note 2 26/32, to 102 10/32. Its yield, which moves in the opposite direction of the price, fell to 3.39 percent, from 3.72 percent.

Following are the results of Monday’s Treasury auction of three- and six-month bills: