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Mr. Milazzo added that analysts who glibly declare that today’s economy is in a depression are unnecessarily scaring people and prompting them to worry needlessly about the safety of money sitting even in fail-safe bank deposits.

In a sign that the panic has spread to small investors, withdrawals from stock and bond mutual funds hit a record $72 billion during September at the onset of the credit crisis, according to TrimTabs, which tracks the flow of money in the economy.

The broad sell-off Thursday left few survivors as trading volume surged nearly by half with the expiration of the short-selling ban. A gauge of the nearly 1,000 stocks previously protected from short-selling fell nearly 10 percent, leading the market’s nose dive.

The Dow and the Standard & Poor’s 500 Index lost more than 7 percent of their value and ended down more than 40 percent below their record highs.

Banking stocks were buoyed at the start of trading by statements from the White House that the Treasury is considering making direct investments in bank stocks to recapitalize the financial system. But by day’s end, hopes of yet another government rescue had faded.

Morgan Stanley, whose complaints about being victimized by short-sellers helped prompt the Securities and Exchange Commission to impose the ban, plunged 26 percent as hedge funds and other short-sellers set their sights on the once towering Wall Street firm.

GM shares plummeted 31 percent while Ford shares slumped 22 percent. Both companies, which have financing units that have been crippled by the credit crisis, had been protected by the ban.

Standard & Poor’s Corp. slashed the automakers’ ratings deep into junk territory and warned that they are likely to run out of cash and face “serious challenges” next year. Investors fretted that they won’t make it that far and that $25 billion in guaranteed loans just enacted by Congress came too late to help.

Rapidly falling oil prices prompted a 12 percent drop in ExxonMobil’s stock, dragging down the Dow industrials. Other oil stocks fell by similar amounts.

In a counterpoint to the stock market, a few rays of hope emerged in the credit markets. In response to a Federal Reserve program this week to buy three-month paper from major corporations, the rates on overnight paper that corporations had been forced to issue for weeks dropped by more than a percentage point.

Frozen markets for state and local debt thawed some, with Massachusetts selling a $750 million note issue it had postponed for weeks, avoiding the need for an emergency loan it had requested from the Treasury. Massachusetts’ success gave hope to California and other states and cities that have had trouble selling short-term debt in recent weeks.

“It looks like the central bank’s actions are starting to help marginally improve confidence enough where safe haven isn’t the only thing on investors’ minds,” said Kim Rupert, managing director at Action Economics. “But it’s only one small step so far. It’s going to be a very jagged type of improvement. There’s still a lot of factors that are going to keep anxiety at elevated levels.”