Stocks slid on Wall Street Thursday, a day after the Dow Jones Industrial Average logged its biggest one-day drop of the year, as investors fretted about the potential for gridlock in Washington.

The Dow closed down 121.41 points, or 0.9 percent, to 12,811.32, bringing its two-day loss to 434 points. The Standard and Poor's 500 index fell 17.02 points, or 1.2 percent, to 1,377.51, and the Nasdaq composite sank 41.71, or 1.4 percent, to 2,895.58.

The Dow plunged 313 points Wednesday, its fifth worst one-day drop following a U.S. presidential election. The biggest, in 2008, came in the midst of the financial crisis on the day after President Barack Obama won his first term.

The two-day slump came in the wake of Obama's re-election to a second term as investors turned their focus back to Europe's problems and the so-called fiscal cliff, a package of tax increases and government spending cuts in the U.S. that will occur unless Congress acts by Jan. 1. Investors see it as a serious threat to the economic recovery.

"The thinking before the election was that it would remove some of the uncertainty, but it seems to have done the opposite," said Tyler Vernon, chief investment officer at Biltmore Capital Advisors in Princeton, N.J.

Stocks are still up on the year, but well below the peak they reached in September. That was when the Federal Reserve announced a third round of its bond-buying program, which is intended to hold down borrowing costs and encourage lending.

The S&P 500 is 6 percent below its high close of the year, 1,465, which it reached on Sept. 14. That was its highest level in nearly five years. It's still up 10 percent for the year.

Investors may be tempted to sell appreciated stock before a possible increase in the capital gains tax at the end of the year, Vernon said. Tax cuts enacted by President George W. Bush expire at the end of this year and the U.S. government wants to cut a $1 trillion budget deficit.

"The mood of the market has certainly switched," said J.J. Kinahan, chief derivatives strategist at TD Ameritrade, as investors monitor developments on the fiscal cliff and wait for more clues about Obama's agenda.

Investors were encouraged by two reports on the U.S. economy that came out before the market opened. The Dow climbed as much as 48 points in the morning but started to sink after the first hour of trading.

The Labor Department reported that the number of people seeking unemployment benefits fell 8,000 last week to 355,000, a possible sign that the job market is healing. Officials cautioned that the figures were distorted by Superstorm Sandy.

A separate report showed that the U.S. trade deficit narrowed to its lowest level in almost two years as exports rose to a record high.

There was also encouraging news from Europe, where leaders shocked markets a day earlier with a dire forecast for economic growth next year.

European Central Bank head Mario Draghi said financial market confidence "has visibly improved" as the 17-country group that uses the euro struggles with its debt crisis. But he said the outlook for the economy remains "weak." Draghi spoke after the bank's governing council left its key interest rate unchanged at 0.75 percent.

The European Commission, the executive arm of the European Union, on Wednesday slashed its outlook for growth for this year and 2013. The report helped set off a sharp decline in stocks in the U.S and Europe.

Spain's government said that it had met its financing needs for the year after raising the equivalent of $6.07 billion in a series of bond auctions on Thursday. Spain became the focal point of the European debt crisis earlier this year amid concern that it would struggle to refinance its debt at affordable rates.

Among stocks making big moves:

— Energy drink maker Monster Beverage sank 57 cents to $44.40 after the company said its revenue growth slowed in the third quarter.

— Dean Foods rose 32 cents to $16.40 after the company reported a third quarter profit of $36 million for the third quarter, compared with a $1.5 billion loss in the same period a year earlier.

— Burger chain Wendy's rose 13 cents to $4.39 after the company said that a key sales figure rose. Revenue at restaurants open at least 15 months rose 2.7 percent, the sixth straight quarter of growth.

— CBS rose 36 cents to $34.36 after the company said that earnings rose 16 percent as falling ad revenue was offset by higher fees from pay TV distributors.