World markets plunged Monday in the worst trading day since the financial crisis, eradicating hundreds of billions of dollars of wealth in a setback to the struggling U.S. economic recovery.
Despite efforts by world leaders to reassure markets, investors remained alarmed over the mounting economic woes in the United States and a spreading debt crisis in Europe. The Dow Jones Industrial Average fell 634.76 points, or 5.55 percent, to 10,809.85.
The plunge in the stock market and a historic downgrade of U.S. debt last week did nothing to change the way the nation's political establishment is waging battle over the federal budget, particularly taxes.
President Obama renewed his search for a new budget agreement that would shave deficits by curbing spending on entitlements and raising taxes on the wealthy, essentially the same position he took last month before his efforts to forge a larger deficit deal with Republicans fell apart.
Congressional Republicans acknowledged that they now will face new pressures to agree to tax increases as part of a broad deficit deal, but again they ruled taxes off the table.
Both major political parties signaled that they see no need to accelerate the deficit talks by a special committee of Congress established by the last debt deal. That committee is charged with filling in the remaining details of $2.5 trillion in deficit reductions, though analysts say that's not enough.
Obama said he would offer a detailed proposal to help that panel -- in a few weeks. Congress made no move to cut short its August recess.
Congressional leaders are scheduled to appoint the 12 members by next Tuesday. The panel is required to hold its first meeting by Sept. 16.
"Does the downgrade change some of the theology in Washington? I haven't seen any evidence of that yet," said Michael Franc, vice president for government affairs at the Heritage Foundation, a conservative research center.
"Progressives are still saying 'don't touch entitlements.' On the tax side, Republicans have signed the pledge not to raise taxes. Those are your theological lines."
"I share Standard & Poor's view that certainly we have a political system that is not AAA," said Robert Bixby, the executive director of the Concord Coalition, a nonpartisan group that works on fiscal issues. "There's a way out; they just don't want to take it."
With markets already dropping last week after Obama and Congress signed a deal to cut projected deficits by $2.5 trillion over 10 years, the Standard & Poor's bond rating agency said Friday evening that it wasn't enough.
S&P downgraded its rating of U.S. government debt, saying the debate left it doubtful that the political system could reach the kind of compromise needed for larger cuts in the deficits.
The company said new tax revenues appeared to be off the table, while meaningful cuts in entitlements seemed unlikely.
Appearing for the first time since the downgrade, Obama said Washington can fix its ills by showing more political will.
"Markets will rise and fall, but this is the United States of America," Obama said. "No matter what some agency may say, we've always been and always will be a triple-A country."
He said he hoped the downgrade would give Washington a "new sense of urgency" on the deficits.
Both sides know what needs to be done to curb runaway deficits, he said: "Tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare."
"It's not a lack of plans or policies that's the problem here," he added. "It's a lack of political will in Washington. It's the insistence on drawing lines in the sand."
Criticized by Republicans for not making a detailed proposal of his own in public, the president said he would offer his recommendations "in coming weeks."
Republicans renewed their opposition to tax increases.
In an open memo to fellow Republicans, House Majority Leader Eric Cantor, R-Va., said the Standard & Poor's analysis wrongly put an emphasis on tax increases as part of any deep cuts in the federal deficits.
"S&P seems particularly focused on what it sees as the inability of the political parties to bridge our differences on the best way to eliminate the deficit. By this it means -- in part -- our unwillingness to raise taxes," Cantor wrote.
"This," he added, "is a trade we simply cannot afford to make."
Franc said Congress needed to cut short its recess, return to Washington and agree to find a larger package of ways to reduce the deficit.
"They need to send a very clear signal that this is not business usual, that this is a wake-up call," Franc said.
"Does it send the wrong signal to simply stay out of town the next four weeks? As much as they may need to recharge their batteries, what kind of signal does it send to the American people and the world that it's recess as usual?"
He said the market plunge Monday could have an effect on Washington, much as a jaw-dropping market drop the same day that the House of Representatives rejected the Troubled Asset Relief Program in 2008 eventually helped force lawmakers back to pass the bill.
Monday's economic developments
President speaks: President Obama said the U.S. always is and always has been a AAA country, despite its rating agency downgrade.
More downgrades: Standard & Poor's Ratings Services downgraded Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt, plus the ratings of farm lenders, long-term U.S. government-backed debt issued by 32 banks and credit unions, and three major clearinghouses that execute trades of stocks, bonds and options.
Dollar weakens: The Japanese yen and Swiss franc climbed against the dollar and most of the world's currencies.
Gold: Prices hit a record high of $1,718.20 in the first day of trading after Standard & Poor's cut the long-term credit rating of the U.S. by one notch to AA from AAA.
Oil: Oil plunged to $81.31 a barrel in New York trading, its lowest price of the year on concerns about the slowing global economy and future demand for oil and gas.
Bonds: Despite the government downgrade, bond prices rose as a stock market rout sent traders into assets considered safe.