Stocks ended a volatile session in the red on Tuesday, despite a sharp drop in oil prices, after economic policy makers issued dour predictions and skepticism arose about the government’s efforts to shore up the nation’s financial sector.

The Dow Jones industrial average ended below 11,000 for the first time in two years, and the broader Standard & Poor’s 500-stock index declined 1.1 percent.

Fannie Mae and Freddie Mac, the beleaguered mortgage finance giants, fell for the fifth day in a row, despite attempts by President Bush and Treasury Secretary Henry M. Paulson Jr. to reassure investors about the government’s rescue plan for the companies. Freddie Mac shares lost 26 percent, and Fannie Mae ended down 27 percent.

Battered bank stocks also closed mostly in the red, although Lehman Brothers managed a 7 percent gain.

In a dizzying day, investors grappled with a spate of mostly bleak economic developments, including pessimistic testimony from Ben S. Bernanke, the Federal Reserve chairman, who warned that significant economic risks remained and that inflation would accelerate.

The dollar fell to a new low against the euro, General Motors said it would cut jobs and suspend its dividend and a report showed that consumer spending slowed in June more than economists had expected.

Stocks fell sharply in morning trading; the Dow was down 200 points after the opening bell.

But shortly after 10 a.m., as Mr. Bernanke was speaking to Congress, investors did a double-take as oil prices, previously trading at record highs, suddenly plunged by $10 a barrel.

“The only times you’ve seen moves like that are in the first gulf war,” Ric Navy, an analyst at BNP Paribas, said.

The surprise development led to a midmorning rally in the stock market, which surged back toward positive territory.

Oil closed down $6.44, at $138.74 a barrel, on the New York Mercantile Exchange, leaving analysts puzzled.

But the market revival did not last. After seesawing between positive and negative territory, the Dow slid in the late afternoon, closing down 92.65 points at 10,962.54. The broader Standard & Poor’s 500-stock index followed a similar trajectory, ending down 13.39 points, or 1.1 percent, at 1,214.91. The Nasdaq composite index closed up 0.1 percent, at 2,215.71.

Mr. Bernanke’s gloomy assessment was reinforced by two government reports released Tuesday, one showing that retail sales were nearly stagnant in June, even after Americans received tax rebates from the government’s stimulus plan, and the other showing that producer prices rose more than expected, a sign of accelerating inflation.

The trouble in the American stock market followed a painful day in overseas markets. European indexes all closed lower.

In London, the FTSE 100 fell 2.4 percent. The CAC-40 in Paris lost nearly 2 percent, and the DAX in Frankfurt slipped 1.9 percent. The Dow Jones Euro Stoxx 50 index, a benchmark of European blue chips, fell 2.29 percent.

The dollar fell to a record low against the euro on worries that the American government had taken on an enormous share of the nation’s financial risks. The dollar rebounded slightly during the day, and the euro settled at $1.5878.

“The U.S. dollar has come under broad selling pressure amid fear that the U.S. Treasury’s contingency plans for Fannie Mae and Freddie Mac will be drawn upon, leading to further strains in the financial system, prolonging the crisis,” Marc Chandler, a currency strategist at Brown Brothers Harriman, wrote in a note to clients.

General Motors shares rose nearly 5 percent after the company announced more job cuts and a suspension of its dividend. Wachovia fell 7.7 percent after a well-known Wall Street analyst, Meredith Whitney of Oppenheimer & Company, deemed the bank’s prospects “bleak.”

The price of the benchmark 10-year Treasury note rose 9/32, to 100 14/32, as some investors sought safety in government bonds. Its yield, which moves opposite its price, fell to 3.82 percent, from 3.86 percent..

Following are the results of Tuesday’s Treasury auction of four-week bills.

David Jolly in Paris and David Stout in Washington contributed reporting