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The stock market fell sharply to its lowest level in nearly a year Tuesday after Citigroup announced a large quarterly loss and an economic report offered more evidence that consumers were cutting back.

The developments left many investors questioning assumptions about how bad things would get as a result of rising mortgage defaults and falling home prices. While the pain so far has been concentrated in the financial services, home building and related sectors, investors are growing fearful that it is spreading.

The Standard & Poor’s 500-stock index closed down 2.5 percent, or 35.30 points, at 1,380.95. The Dow Jones industrial average was off 277.04 points, or 2.2 percent, at 12,501.11. The Nasdaq composite was down 60.71, close to 2.5 percent, at 2,417.59.

The S&P 500 is down 5.95 percent for the year, its third-worst performance in the first 10 trading sessions of any year, according to Howard Silverblatt, chief index analyst at S&P. The index fell further in 1939 (6.66 percent) and 1978 (5.96 percent).

“Right now, you have a market that is more of an emotional market than a rational market,” said Wayne Lin, an investment strategy analyst at Legg Mason’s global asset allocation division. “General human nature has it if there is an unknown out there, you fear the unknown.”

The day started with an announcement from Citigroup, the world’s largest bank, that it was taking a $22.2 billion charge largely related to mortgage holdings, cutting its dividend by 41 percent and raising $12.5 billion in capital from foreign and domestic sources. Shares of Citigroup fell 7.3 percent, to $26.94.

Merrill Lynch, which has also been rattled by its mortgage business, said it was raising $6.6 billion from two sovereign wealth funds and a Japanese bank. Merrill stock was down 5.3 percent, to $53.01.

Later in the morning, investors were taken aback by a 0.4 percent drop in retail sales in December, as sales fell for building materials, gasoline, clothing, electronics, and sporting goods. The Commerce Department, which reports the data, also revised downward its reports for sales in October and November.

“The momentum is down,” said James O’Sullivan, an economist with UBS. “Based on the limited information we have, January looks even weaker.”