NEW YORK -- Stocks plunged Wednesday as the U.S. edged closer to defaulting on its debt and the economy showed more signs of deteriorating. Major indexes gave up all of their gains for the month.

"As hours pass and the uncertainty builds, I think the market is starting to price in the potential that we might not have a solution by August 2," the deadline for raising the U.S. debt limit, said Channing Smith, managing director of Capital Advisors. "Confidence in our political system is beginning to fade."

--The Dow Jones industrial average fell 198.75 points, or 1.6 percent, to 12,302.55, its biggest one-day drop since early June. It has fallen for four days straight.

--The S&P 500 fell 27.05 points, or 2 percent, to 1,304.89.

--The technology-focused Nasdaq composite index fell 75.17 points, or 2.6 percent, to 2,764.79, its worst day in five months.

The Dow is headed for its worst weekly decline in nearly a year and is now 4 percent below the 2011 high it reached April 29. The S&P, which serves as a benchmark for most mutual funds, also is down 4 percent from its recent peak.

Nearly half of the Dow's losses came in the last two hours of trading, after the Federal Reserve released a survey showing that the economy deteriorated in much of the country this summer. The economy slowed in eight of the Fed's 12 regions because of weak home sales and a slowdown in manufacturing.

Further such evidence came in a separate report Wednesday from the Commerce Department, which found that businesses reduced orders for airplanes, autos, heavy machinery and other long-lasting manufactured goods in June.

Orders for durable goods fell 2.1 percent, the department said, the second drop in three months. The decline was driven by a big drop in orders for commercial aircraft. Orders for autos, auto parts and computers also fell. And a key category that tracks business investment plans dropped 0.4 percent.

The declines on Wall Street were broad. More than 10 stocks fell for every one that rose on the New York Stock Exchange, and all but two of the 30 stocks in the Dow average fell.

With no sign of a compromise in Washington, investors are becoming more fearful that the U.S. rating could be lowered. That would raise interest rates and slow down the already weak economy.

Small-company stocks fell more than the rest of the market. Small companies are more vulnerable to economic downturns since they make fewer products and usually have less cash on hand than large companies.

With the deadline for a debt deal just six days away, investors are selling the stocks they consider to be the riskiest.

The Russell 2000 index, which tracks smaller U.S. companies, fell 3 percent, almost twice as much as the Dow.

Stocks have been falling overall since last Friday as the Aug. 2 deadline for raising the U.S. borrowing limit approaches. With no sign of a compromise between Republicans and Democrats in Washington, investors are becoming more fearful that the U.S.'s triple-A credit rating could be lowered or that the country might default on its debt.

Either event would raise interest rates across the board and slow down the already weak U.S. economy.

Some analysts said they fear that if the debt issue is not resolved, stocks could fall as much as they did in the fall of 2008, when the House of Representatives voted down a bill to create the Troubled Asset Relief Program.

The Dow plunged 778 points on Sept. 29 after the bill failed. Four days later, Congress passed the TARP bill and President George W. Bush quickly signed it into law. The Dow then jumped as much as 946 points in a week.