Investors may be itching to pull the trigger and sell their stocks, but perhaps people can take comfort in knowing that, historically, September is always the market’s worst month.

According to Marketwatch, on average the Dow Jones industrial index falls about 1.13% in September. Since 1971, the Nasdaq has fallen an average of 1.02% during the month, while since 1950, the S&P 500 has dropped an average of 0.69% in September.

As of today, though, this month has been a lot worse than the average. The S&P 500 has fallen about 7%; the DJIA is down 7.4%; Nasdaq is down 4.29%, while the S&P/TSX has dropped the most—a whopping 9.4%.

Some people believe that September is the worst month for two reasons: people come back from vacation and start trading again, and many portfolio managers sell out of losing positions because their fund companies report year ends that month.

So even if the economy wasn’t in turmoil, it’s likely your portfolio would be down. But, of course, what we’re seeing now is much different. The main reason for the late-September market dump is because the Federal Reserve announced that it would, once again, purchase long-term Treasury bonds, about $400-billion dollars worth. It’s also selling more short-term government debt.

The U.S. government has done this twice before and it hasn’t had the positive economic impact that most people had hoped. So when the Fed announced on Sept. 21 that it was buying more bonds, it didn’t help assuage anyone’s fears. In fact, it made people more nervous—many think the U.S. is grasping for solutions to its economic woes.

Clark Yingst, chief market analyst with investment firm Joseph Gunnar told The New York Times that improving access to cheap credit—the bond buy has pushed long-term interest rates lower—may not even be the problem. Lower interest rates, he says, could make banks want to lend less.

“It could backfire,” he told the Times.

With Europe’s economic crisis worsening too—Italy was just downgraded by S&P and many people seem to think Greece is on the verge of default—it’s anyone’s guess as to whether the coming months will be even worse than this September.

If history’s any indication though, be prepared for a dismal October. It’s the month that’s seen the largest market crashes.

On Oct. 29, 1929, the Dow fell by 12.8%, starting the depression. On Oct. 19, 1987, the Dow fell 22.6%. Incredibly, North American markets also crashed in October 2008—between Oct. 6 and 10 the Dow fell about 18%.

So hang on to your stocks, it’s likely the bumpy ride won’t be over for a while—at least until November.

U.S. stock indexes lost more than 3 percent of their value, as the Dow Jones Industrial Average plummeted 3.51 percent to 10,733.83 and the S&P 500 fell 3.19 percent. With new data pouring in suggesting that China’s growth is slowing and Europe may be entering a recession, investors panicked, pushing equities and commodities such as gold and oil downward.

Many investors had entertained modest hopes for Federal Reserve action that would help the global economy avoid a possible recession. But disappointed by the broad outline of the Fed’s program to shift its portfolio toward longer-term securities, dubbed Operation Twist, they retreated as they became increasingly convinced that the global economy is headed for a slowdown.

“Europe is going through their Lehman Brothers moment now,” said Philip J. Orlando, chief equity market strategist at Federated Investors.

Hedge funds led the global sell-off on Wednesday and Thursday, since they are “absolutely certain that we’re already in a double-dip recession,” Orlando said. He added that the markets have been swinging further up and down this past summer because investors are caught in a “tug-of-war” deciding between whether the economy is experiencing slow growth or a double-dip recession.

New data showed that business activity in the European Union is contracting, increasing the likelihood of a double-dip recession in Europe. In response, major European stock indices plummeted 5 percent on Thursday.

Europe probably is about to enter a recession that will drag down on growth in the United States, said Gus Faucher, director of macroeconomics at Moody’s Analytics. He said that a recession in Europe would tighten lending from European banks to American companies, reduce American exports to Europe, and bring down U.S. stock prices, spurring American consumers to spend less because they would be more nervous about the economy.

China, an engine of global economic growth, also appears to be in retreat. Recent data revealed that China’s manufacturing sector seems to be contracting, fueling fears that China’s overall economy is slowing as China’s central bank tightens the money supply.

Investors are nervous about the prospect of a slowdown in China, since China has largely fueled global growth with its increasing demand for goods and services, Faucher said. “As growth in China weakens, then yes, I think we could have a substantial global slowdown,” he said.

Stocks started to plummet on Wednesday after the Federal Reserve released a report noting that there are “significant downside risks” to the American economy — sending stocks reeling.

“Given the fragile state of the markets, I think investors were hoping for something a little more out of the box from the Fed,” said Anthony Valeri, markets strategist for fixed income with LPL Financial.

While investors hoped that the Fed would announce more drastic action to alleviate the slowing economy, stocks started to plummet after the Fed announcement, and the Fed’s decision to shift its portfolio toward longer-term securities would not have a “material impact” on the economy, Valeri said. But he emphasized that the markets are being driven primarily by “economic data” indicating a global slowdown.

Investors wondered why the Fed would release such a gloomy statement without announcing more drastic action to stimulate the economy, said Clark Yingst, chief market analyst for the investment firm Joseph Gunnar.

As investors grapple with a potential slowdown in Europe and Asia, the likely direction for the stock market may be further down. Mark Vitner, senior economist at Wells Fargo Securities, said of the stock market, “I think we’re headed down for a while.”

Markets dropped sharply Friday as rumors of a possible Greek default circled the globe. The default could come as early as this weekend. Whether or not something happens in Greece will largely rule market sentiment as the market opens in New York Monday.

“I think if we don’t hear anything on Greece, there could be a relief rally on Monday,” says Sam Ginzburg, head of capital markets at First New York.

Investors sold stocks Friday in fear that Athens may not get its next installment of bailout money from the European Union, International Monetary Fund and European Central Bank and that the bankruptcy could come to light over the weekend.

Europe’s debt crisis: 5 things you need to know

Meanwhile investors continue to cling to any reading on the fragile state of the economy. On Thursday, the Commerce Department will release the consumer price index, the government’s main inflation gauge.

The CPI index will be the final reading on inflation ahead of the two-day meeting of the Federal Reserve beginning September 20. Investors are betting that if the U.S. economy shows evidence of deflation, the Fed may be more willing to take steps to shore up the economy.

Investors could bid up stock prices if they expect the Fed to introduce another round of bond buying, or so-called QE3, after the meeting. According to minutes from the previous Fed meeting, the three so-called inflation doves dissented against Fed intervention because the U.S. economy showed signs of a healthy rate of inflation.

“The market wants to handicap every event so they might take any indication of deflation or no inflation as a sign that dissent within the Fed won’t be significant,” says Clark Yingst, chief market analyst at Joseph Gunnar.

Stocks ended sharply lower Friday, as bad news out of Europe kept piling up. The day’s steep losses pushed all three indexes to end in the red for the week. The Dow declined more than 2%, the S&P fell 1.7% and the Nasdaq slipped 0.5%.The sell-off triggered the sixth weekly decline in seven weeks for the Dow and S&P 500.

On the docket

One thing investors should bet on: continued volatility. “The market is in a really binary situation. Investors think the world is going to get better or worse,” says Ginzburg. “Macro factors and psychology are the most important factors for investors right now and are more important than the fundamentals of any one company.”

Monday: Investors will anxiously await Bank of America (BAC, Fortune 500) CEO Brian Moynihan’s 9 a.m. presentation at the Barclays investors conference in New York for any insights into the bank’s plans.

Tuesday: A report on August’s import and export prices is due in the morning.

Big-box retailer Best Buy (BBY, Fortune 500) will report quarterly earnings before the opening bell.

Wednesday: The Producer Price Index, a measure of wholesale inflation, is due out from the Commerce Department ahead of the opening bell. The index is expected to have stayed the same in August after rising 0.2% in July. The so-called core PPI, which strips out volatile food and energy prices, is expected to have risen 0.2% after increasing 0.4% the previous month.

Economists expect the Commerce Department to report that retail sales rose 0.2% in August after a 0.5% rise the previous month, according to consensus estimates gathered by Briefing.com. Sales excluding volatile autos are expected to have ticked up 0.3%.

No ‘F’ in VIX. It measures volatility, not fear.

The July reading on business inventories, due from the government later in the morning, is likely to show an increase of 0.5%.

Thursday: The U.S. consumer price index is expected to show that prices rose 0.2% in August, after rising 0.5% the previous month. Economists expect consumer prices excluding food and energy to inch up 0.2%, matching July’s uptick.

The government’s weekly report on initial claims for jobless benefits is expected to drop to 410,000, from 414,000 the previous week.

The Empire Manufacturing survey is also due before the start of trading. The regional reading on manufacturing is forecast to have risen to negative 4 in September from negative 7.7 in August, according to consensus estimates from Briefing.com.

Government data on industrial production and capacity utilization for August are also due before the market opens.

Also out at 10 a.m. ET in the morning is the Philadelphia Fed index for September, a regional reading on manufacturing. The index is forecast to fall to negative 10, up from negative 30.7 the previous month.

BlackBerry maker Research in Motion is scheduled to report earnings after the markets close.

Friday: Shortly after the opening bell, the University of Michigan will put out its initial reading on consumer sentiment in September. Economists expect the figure to move slightly higher to 56.3 up from 55.7.

“There’s that nagging thought that we can continue to have a downward spiral in Europe,” James Dunigan, chief investment officer for PNC Wealth Management, told Bloomberg News. “There’s concern of a default, of risk in banks, of a liquidity crisis. In the U.S., even as President Obama made an effort to put that plan together, there’s not a whole lot of confidence that Congress will pass.”

Clark Yingst, the chief market analyst at Joseph Gunnar, told the New York Times that positive moves in the markets earlier this week were in preparation for Obama’s announcement of a pro-jobs stimulus plan, but that “the market just doesn’t believe that it is going to be passed by that Republican House.”

In Europe, Juergen Stark, the top economist at the European Central Bank, resigned, causing a ripple of fear about possible debt default by struggling countries there. He reportedly quit because he opposed the ECB’s extensive purchases of those nations’ debt, according to the Associated Press.

With many of those countries’ bonds held by major banks throughout Europe, a default would severely hurt the continent’s economy, so the resignation of a key economist who had been fighting the moves was seen as “a bit of news that contributes to a worse outcome, so if you’re thinking of being a seller, today that’s what you are,” Andrew Goldberg, market strategist with J.P. Morgan Funds, told AP.

No matter the reason, the effects were large. Several Silicon Valley stocks tumbled with the markets Friday, including drops of more than 4 percent by Hewlett-Packard (HPQ), eBay (EBAY), Gilead, SunPower (SPWRA) and AMD. The Dow Jones industrial average closed below 11,000.

AOL CEO checks in on possible merger with Yahoo

One of the few stocks to increase on Friday was Yahoo (a scant 0.3 percent rise), but that was not because a sense of stability arrived at the Web company’s Sunnyvale headquarters.

A Bloomberg News report Friday said AOL was discussing a merger of the two companies with Yahoo advisers, with AOL CEO Tim Armstrong leading the talks.

According to the report, Armstrong made similar overtures while Bartz was at the helm, but she had no interest. Now, with Bartz out of the way, Armstrong is pushing for a deal which would have Yahoo buy AOL and install him as CEO of the merged companies.

This sort of deal has been rumored for some time, and analysts are not enthralled by the idea. As Karsten Weide, an industry analyst at IDC, told Mercury News columnist Chris O’Brien earlier this week about an AOL-Yahoo merger, “Two turkeys don’t make an eagle.”

CNBC later tweeted that Yahoo is not interested in Armstrong’s plan, but the company is obviously preparing for something, as they have been in contact with two different banks that could help manage a sale or merger for all or part of the company.

Sprint considering unlimited data for iPhone users

When Sprint begins offering the iPhone next month, it will offer unlimited data plans for $99.99 a month in order to distinguish itself from bigger rivals AT&T and Verizon, according to a report.

Verizon and AT&T both cap data usage and charge different amounts depending on how much their customers use the device. Sprint, which has not turned a profit in more than a year, wants to offer something better to users in their long-awaited entry into the market for the popular Apple (AAPL) smartphone, Bloomberg reported.

Will the tactic succeed?

“The advantage of unlimited is, it’s cheaper for the big users,” said Peter Rhamey, an analyst at Bank of Montreal. “Consumers will pay a premium for unlimited.”

Silicon Valley tech stocks

Up: Yahoo

Down: Hewlett-Packard, eBay, Gilead, SunPower, AMD, Electronic Arts (ERTS), Cisco (CSCO), Oracle (ORCL), Google (GOOG), Apple

The tech-heavy Nasdaq composite index: Down 61.15, or 2.42 percent, to 2,467.99

The blue chip Dow Jones industrial average: Down 303.68, or 2.69 percent, to 10,992.13

And the widely watched Standard & Poor’s 500 index: Down 31.67, or 2.67 percent, to 1,154.23

Analysts attributed the declines, which pushed down indexes more than 5 percent for the month to date, at least partly to reactions related to the resignation of a top financial official at the European Central Bank, a development that put a spotlight on the internal discord over the response to the debt crisis. Jürgen Stark, a German who is leaving his position on the executive board of the E.C.B., is known as an opponent of the bank’s bond-buying program.

In addition, a Bloomberg News report said Germany was preparing banks in the event that Greece failed to meet the terms of its aid package and defaulted.

“These are particularly negative headlines, and the market took them as such,” said Dan Greenhaus, the chief global strategist at BTIG. “Market participants are increasingly nervous about a Greek default and its effect on the already weak European bank sector.”

He added that the resignation news “exacerbated” concerns about the euro currency zone.

Greece’s finance minister, Evangelos Venizelos, dismissed the talk of a default and said it was committed to fully executing the terms of the aid package, Bloomberg News also reported.

But concern over the euro zone debt crisis, along with uncertainty related to global economic growth, has been a touchy factor affecting the markets for months.

The DAX in Germany fell 4 percent. The FTSE 100 in Britain closed down 2.4 percent, and the CAC 40 index in France was down 3.6 percent.

Stocks in the United States followed markets in Europe. The Standard & Poor’s index of 500 stocks closed down 31.67 points, or 2.7 percent, at 1,154.23. The Dow Jones industrial average fell 303.68 points, or 2.7 percent, to 10,992.13, and the Nasdaq composite index was down 61.15 points, or 2.4 percent, to 2,467.99.

The S.& P. and the Dow were each down more than 4 percent in the week, and the Nasdaq was just over 3 percent lower.

A speech on jobs by President Obama did little to lift the malaise because of uncertainty over whether the program would pass and help the recovery, analysts said.

Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide, said short-term interest rates in Greece reflected uncertainty in Europe as well as speculation over whether there would be adequate restructuring in that nation’s economy to address its problems.

Yields on Germany’s 10-year bonds declined. In the United States, the Treasury’s benchmark 10-year note rose to 101 27/32, and the yield fell to 1.92 percent from 1.98 percent late Thursday, after touching a low of 1.89 percent during the day.

“Issue No. 2 is the continued anxiety in the United States that the recovery continues to stall and that we will not be getting growth as strong as we would need in terms of corporate profits,” said Mr. Ballew.

“Even yesterday’s speech raises questions of whether there will be support for fiscal policy,” he said about the president’s jobs address.

Mr. Obama’s plan focused on generating jobs and included a number of tax cuts and spending proposals, like an extension and expansion of the cut in payroll taxes and a tax holiday for small businesses for hiring new employees.

Mr. Ballew said that questions persisted about how much of the proposal would pass.

In addition, investors are awaiting a Federal Reserve policy meeting later this month. Stocks were sharply lower on Thursday after the chairman of the Federal Reserve, Ben S. Bernanke, gave no sign that there would be fresh stimulus measures.

“If you are in the market right now, you   ’ve got uncertainty on top of uncertainty on top of uncertainty,” Mr. Ballew said. “You have got a pretty toxic mix.”

Volatility, as measured by the Vix, was just over 40, its highest level since Aug. 22, when it was 42.44.

Energy, financials and materials stocks lost the most on Friday, or more than 3 percent each.

Clark Yingst, the chief market analyst at Joseph Gunnar, said that the fall of the euro against the dollar on Friday, resulting in a six-month low, suggested that the S.& P. 500 had not yet completed its recent correction.

“The market just doesn’t believe that it is going to be passed by that Republican house,” Mr. Yingst said of Mr. Obama’s speech.

He noted that the United States bond’s 10-year price recently touched record highs, with the yield lower than where it was in the midst of the global financial collapse, 2.055 percent in December 2008.

“It is an indication that bond investors clearly see a significant slowdown in the U.S. economy,” he said.

Jack Ewing and Nicholas Kulish contributed reporting from Frankfurt.

Blue-chip stocks surged toward their second triple-digit gain in three sessions Thursday after a proposal to handle Greece’s debt crisis convinced more investors to snatch up risky assets.

The Dow Jones Industrial Average added 124 points, or 1%, to 12697 in midday action. Overseas headlines combined with deal news and a more encouraging reading on mid-Atlantic manufacturing activity to drive investor sentiment. The Standard & Poor’s 500-stock index gained 15 points, or 1.1%, to 1341 led by financial stocks. The Nasdaq Composite rose 16 points, or 0.6%, to 2830.

The gains left the blue-chip Dow roughly 1% below the multi-year closing high reached in late April. Despite recent months’ rocky trading, the DJIA has held onto a 9.6% advance for the year.

European leaders homed in on ways to reduce Greece’s debt burden Thursday as they met in Brussels, aiming for a plan that stems the threat of sovereign-debt contagion. Before the open, European leaders outlined a proposal to extend loan maturities and lower interest rates for Greece and other heavily indebted euro-zone countries. U.S. stock futures immediately jumped with the release of the draft version of a proposal to reduce interest rates on European Financial Stability Facility loans to as low as 3.5%, while extending loan maturities to at least 15 years. Euro-zone leaders also indicated that they will no longer rule out a selective default on Greece’s debt.

“The risk trade is on for the moment,” said Clark Yingst, chief market analyst at Joseph Gunnar & Co. “The news had better be as substantive as what the market currently anticipates. If it’s not, I think you’ll see a decline, or at least a partial reversal” of the morning’s stock-market gains.

U.S. stocks added to their early gains after the Federal Reserve Bank of Philadelphia reported a gain for mid-Atlantic manufacturing activity, though the increase was still small. The figure outstripped economists’ expectations.

A weak reading on U.S. employment appeared to have little effect on investor sentiment. New claims for jobless benefits unexpectedly rose last week to a seasonally adjusted 418,000, Labor Department data showed, a setback for a persistently weak job market.

“High unemployment has become the norm,” said Jeffrey Phillips, chief investment officer at Rehmann Financial. “It doesn’t reflect a healthy [gross domestic product] or healthy economy. [But] I don’t see the jobs figures playing a significant role” in the equity market, Phillips said, as many market participants have already priced the factor into their investment decisions.

Medco Health Solutions surged 13% and was one of the strongest performers in the S&P 500 following Express Scripts’ $29.1 billion deal to buy the company. Express Scripts’ stock rose 4%.

On the earnings front, Morgan Stanley climbed 8.7% after swinging to a loss on a restructuring charge but showing resurgent revenues in the company’s investment banking, trading and wealth-management units.

Robert Half International led the S&P 500 with a 16% gain. The temporary-staffing company’s second-quarter earnings tripled for the second-straight quarter, which was highlighted by strength in permanent placements and technology staffing.

EBay rose 1.9% after posting a 25% jump in second-quarter revenue and raising its full-year forecast, as the online market’s payments and sales businesses demonstrated strong growth.

After the close, Dow component Microsoft will reveal its fiscal fourth-quarter report.

Gold futures rose near $1,598 an ounce after losing ground the previous two sessions. Crude-oil futures gained to near $100 a barrel. The U.S. dollar fell versus the euro and the yen.

By Brendan Conway

U.S. stocks jumped after a proposal to handle Greece’s debt crisis convinced more investors to snatch up risky assets.

The Dow Jones Industrial Average added 164 points, or 1.3%, to 12734 midmorning, as overseas headlines combined with deal news and a more encouraging reading on mid-Atlantic manufacturing activity to drive investor sentiment. The Standard & Poor’s 500-stock index gained 19 points, or 1.4%, to 1344, led by energy and financial stocks. The Nasdaq Composite rose 31 points, or 1.1%, to 2845.

Before the open, European leaders outlined a proposal to handle Greece’s sovereign-debt crisis that would extend loan maturities and lower interest rates for heavily indebted euro-zone countries. U.S. stock futures immediately jumped with the release of the draft version of the European proposal, which said the euro zone would reduce interest rates on European Financial Stability Facility Loans to as low as 3.5%, while extending loan maturities to at least 15 years.

Euro-zone leaders also indicated that they will no longer rule out a selective default on Greece’s debt.

“The risk trade is on for the moment,” said Clark Yingst, chief market analyst at Joseph Gunnar & Co. “The news had better be as substantive as what the market currently anticipates. If it’s not, I think you’ll see a decline, or at least a partial reversal” of the morning’s stock-market gains.

U.S. stocks added to their early gains after the Federal Reserve Bank of Philadelphia said its index of general business activity in the factory sector showed a gain for mid-Atlantic manufacturing activity, though the expansion’s pace is still weak pace. The figure outstripped economists’ expectations.

A weak reading on U.S. employment appeared to have little effect on investor sentiment. New claims for jobless benefits unexpectedly rose last week to a seasonally adjusted 418,000, Labor Department data showed, a setback for a persistently weak job market.

Medco Health Solutions surged 15% and was one of the strongest performers in the S&P 500 following Express Scripts’ $29.1 billion deal to buy the company. Express Scripts’ stock rose 5.7%.

On the earnings front, Morgan Stanley climbed 5.4% after swinging to a loss on a restructuring charge but showed resurgent revenues in the company’s investment banking, trading and wealth-management units.

Robert Half International led the S&P 500 with a 15% gain. The temporary-staffing company’s second-quarter earnings tripled for the second straight quarter, which was highlighted by strength in permanent placements and technology staffing.

After the close, Dow component Microsoft will reveal its fiscal fourth-quarter report.

Gold futures eased below $1,596 an ounce after losing ground the previous two sessions. Crude-oil futures gained to near $100 a barrel. The U.S. dollar fell versus the euro and the yen.