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Foremost among them is the tightening of credit conditions, Bernanke told the Joint Economic Committee in his second consecutive day of congressional testimony. Bernanke repeated his call for massive government purchases of shaky mortgage assets as a move to free up lending in the nation's financial sector and keep credit flowing through the economy.

"The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth," said Bernanke.

As Congress considers the Bush administration's $700 billion bailout plan to rescue the U.S. financial system that Bernanke and others say needs to be passed by Friday, Bernanke laid out a more dismal outlook for the U.S. economy.

His testimony did not signal that the Fed is poised to cut interest rates, but suggested that Fed policymakers may be more open to it at their late-October meeting than they were at their previous meeting last week, particularly if the credit crisis continues to deepen or there is new evidence that the economy is getting sharply worse.

But financial stress isn't the only area where Bernanke described trouble.

Americans' spending fell in June and July, and based on early data it looks to have fallen again in August.

"Although the retrenchment in household spending has been widespread, purchases of motor vehicles have dropped off particularly sharply," Bernanke said.

He noted that despite some signs of stabilization in home sales, sharply fewer new homes are being started, which could put further downward pressure on construction-related fields.

And while business investment held up through the first part of the year, "a range of factors, including weakening fundamentals and constraints on credit, are likely to result in a considerable slowdown in the construction of commercial and office buildings in coming quarters," the Fed chairman said. He noted that spending on business equipment and software also appear poised to fall.

Moreover, international trade has been a big driver of growth through the first part of the year, but that appears set to dissipate in the months ahead amid a slowing global economy and deterioration in world financial markets.

The one bright spot in the outlook has been falling prices for energy. But Bernanke said that the inflation outlook remains "highly uncertain," and that "the fluctuations in oil prices in the past few days illustrate the difficulty of predicting the future course of commodity prices."

The insurer, American International Group, faces a cash crunch that grew more severe last night when the major credit-rating agencies warned investors that the company could have greater difficulty in meeting its obligations. It was unclear whether the downgrades by the agencies would force AIG to post additional collateral at a time when it is having difficulty raising money.

Investors sent the Dow Jones industrial average plunging more than 500 points, or 4.4 percent, for the biggest point loss since the Sept. 11 terrorist attacks seven years ago. About $700 billion in shareholder value disappeared in a single day of trading.

The wrenching reshaping of Wall Street -- which over the weekend included the demise of one big firm and the sale of another -- also pushed the value of the dollar lower. It sent the price of crude oil below $100 a barrel for the first time since Feb. 15 as traders bet a global downturn would reduce the demand for energy.

Wall Street's biggest shakeout since the Great Depression stems from a collapse in housing prices, which spread losses among firms that bet on securities linked to mortgages. Twice in the past year, regulators intervened to save financial firms and prevent further erosion in the housing markets. But over the weekend, officials drew the line at rescuing the storied investment bank Lehman Brothers, which yesterday filed for bankruptcy protection.

"We had a very, very tough day on the market," said Art Hogan, chief market analyst at Jefferies & Co. "Investors are anxious about the spillover effect of Lehman and what is the next shoe to drop."

As investors digested the news, some economists worried whether Wall Street's troubles were spilling over into other parts of the economy, renewing pressure on the Federal Reserve to cut interest rates when it meets today.

Fed leaders, however, believe it is too early to tell what the impact might be, and they are unlikely to cut rates for now.

In the meantime, Treasury Secretary Henry M. Paulson Jr. signaled yesterday that taxpayer funds could still be used broadly to "maintain the stability and orderliness of our financial system" but that he was pressing healthier Wall Street firms and commercial banks to join together to assist in rescuing individual firms -- much like the purchase of Merrill Lynch on Sunday by Bank of America.

Goldman Sachs, for instance, was asked by the Federal Reserve Bank of New York to help AIG, a $1 trillion-asset insurance company that serves 74 million consumers in 130 countries. AIG had been heavily involved in the business of issuing complex insurance contracts to investors in securities backed by mortgages, and the collapse of subprime and other home loans threatened to hobble the company and trigger a chain reaction in the financial system.

J.P. Morgan Chase, which is serving as AIG's financial adviser, was seeking support for a credit line of $70 billion to $75 billion that would involve multiple lenders, spreading the risk, according to two sources familiar with the discussions. They spoke on condition of anonymity because the talks were private.

New York's governor, meanwhile, said his state would allow AIG to use $20 billion from its own insurance subsidiaries to ease a financial crunch. By posting the assets as collateral, AIG can borrow money to run its day-to-day operations, Gov. David A. Paterson (D) said. The move required special dispensation from state insurance superintendent Eric R. Dinallo, who is responsible for protecting the stability of AIG insurance companies in New York and their policyholders