Market sinks on oil, recession fear on day after Fed

NEW YORK (Reuters) - Stocks fell on Wednesday as investors sold stocks to take profits after Tuesday's Fed-aided rally, while a sharp drop in oil prices drove energy shares lower. The Standard & Poor's index of materials stocks (.GSPM) fell 4.9 percent as persistent worries about a recession and the health of the U.S. economy weighed on commodity prices.

On Tuesday, the S&P 500 made its biggest one-day jump in more than five years after the Federal Reserve cut short-term U.S. interest rates by 75 basis points. The Fed's decision, which was expected, brought the benchmark fed funds rate for overnight bank loans down to 2.25 percent from 3.0 percent.

Energy shares were among the biggest drags on the market as the price of oil slid more than $6 a barrel after worries about the economy overshadowed bullish weekly data.

An index of energy shares (.GSPE) fell 3.8 percent -- its biggest one-day percentage drop since October.

Exxon Mobil shares were the S&P's biggest laggard, falling 2.4 percent to $86.33, while ConocoPhillips (COP.N) slid 4.8 percent to $74.53 and Chevron (CVX.N) fell 3.2 percent to $83.37.

Meanwhile, the Chicago Board of Options Exchange Volatility Index (.VIX) -- Wall Street's favorite fear gauge -- jumped 12 percent a day after its fourth-biggest daily drop in 14 years.

"The bottom line is the recession is something that everyone is now accepting as a reality even though we've seen great news out of Fannie and Freddie this morning," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

The Dow Jones industrial average (.DJI) fell 156.55 points, or 1.26 percent, to 12,236.11. The Standard & Poor's 500 Index (.SPX) dropped 15.39 points, or 1.16 percent, to 1,315.35. The Nasdaq Composite Index (.IXIC) declined 27.57 points, or 1.22 percent, to 2,240.69.

"What you're probably seeing right now is simply profit-taking. People have decided that they got what they can out of the Fed meeting and they are now taking some money off the table," said Peter Jankovskis, director of research at OakBrook Investments LLC in Lisle, Illinois.

Shares of Alcoa Inc (AA.N) fell 5.6 percent to $36.45 and Caterpillar Inc (CAT.N) dropped 3 percent to $74.54.

Shares of Fannie Mae (FNM.N) climbed 11.4 percent to $31.43, while Freddie Mac (FRE.N) shot up 18.4 percent to $30.79 after they won approval to pump $200 billion into the distressed U.S. housing market.

(Editing by Jan Paschal)