U.S. stocks fell sharply Monday and gold surged in whipsaw trading as investors fled from risky assets in the first activity since Standard & Poor's downgraded the federal government's credit rating late Friday.

The Dow Jones Industrial Average dropped 303 points, or 2.7%, to 11141 shortly after noon, staging a deep selloff that added to last week's losses. The blue-chip measure fell by as much as 385.12 points in morning trading.

Investors' flight from risk was clearly visible in the first trading since S&P's downgrade of the U.S. credit rating to double-A-plus from triple-A. Gold futures soared above $1,708 an ounce as investors sought assets viewed as havens. One winner was U.S. Treasurys, which remained a haven for many investors despite the downgrade. Yield on the 10-year note fell to 2.3721% in recent action.

"It does have the feeling of panic selling," said Hank Smith, chief investment officer of equities at Haverford Investments. "The bond vigilantes have been replaced with 'risk on, risk off' vigilantes. How else do you explain a downgrade of your debt and yields go down?"

In preparation for Monday's market activity, the New York Stock Exchange invoked the little-used Rule 48 before the start of trading. The procedure lets market makers refrain from disseminating price indications ahead of the bell, making it easier and faster to open trading in the stock market.

The Standard & Poor's 500 stock index tumbled 40 points, or 3.3%, to 1160, with financial and energy stocks falling hardest. The Nasdaq Composite slumped 87 points, or 3.4%, to 2446.

Traders said the fact that the swoon came right on the heels of the Dow's biggest weekly point loss since the financial crisis in 2008 set up many market participants for forced sales and margin calls. That made some of the losses self-perpetuating.

"There is a lot of forced liquidation," said Lorenzo Di Mattia, manager of Sibilla Global Fund, and such actions "might last another day perhaps."

Bank of America Corp. (BAC) plunged 14% to lead decliners, stung by both a steep selloff in financial stocks and by word that American International Group Inc. (AIG) is planning to sue the company, along with a host of other prominent financial institutions, as it seeks to recover losses on mortgage-backed securities. AIG's stock fell 7.2%.

All S&P 500 sectors declined and all but one component of the DJIA declined as investors sold off Monday.

The Dow fell 5.8% last week as investors lost faith in European leaders' ability to stave off a debt crisis and as fears grew that the economic slowdown would deepen into a recession. Last week's declines sent the broader S&P 500 to a 7.2% loss and the Nasdaq Composite to fall 8.1%. All three major U.S. stock indexes are in negative territory for 2011.

Gold miners and precious-metals exchange-traded funds bucked the broader trend as they followed the precious metal higher. Newmont Mining gained 5%, AngloGold Ashanti rose 3.6% and SPDR Gold Trust gained 2.7%.

Many market participants still hoped that stocks could snap back from Monday's losses, which they viewed as a buying opportunity. A late-morning paring of the steep, early losses came after word that President Obama intended to deliver a statement at 1:00 p.m. EDT.

For some investors, worries about the strength of the global economy loomed just as large, if not larger, than the credit matters. Growth worries have reverberated through markets in recent weeks.

"The market is probably more concerned with the economic risk than with the S&P credit rating," said Bernie McDevitt, vice president of institutional trading at Cheevers & Co. "[Investors have] clearly decided we have further work to do [falling] lower."

The U.S. downgrade competed for investor attention with sovereign-debt headlines in Europe. European stocks erased early gains as the European Central Bank's pledge to buy sovereign bonds failed to restore investor confidence for long, with the Stoxx Europe 600 hitting a 15-month low.

Asian bourses were pummeled, with China's Shanghai Composite dropping nearly 4% to a 13-month low. The Group of 20 leading industrialized and developing nations statement that they were prepared to act in coordination to stabilize markets also failed to stem the selling tide.

Crude-oil futures slid below $84 a barrel amid worries about the economy.

The U.S. dollar fell against the yen, but moved higher against the euro.

The economic calendar was bare Monday, but investors will look forward to the Federal Reserve's monetary-policy statement on Tuesday for an indication of how worried policy makers are about the market's tumble and the slowing economy.

In corporate news, shares of blue-chip telecommunications company Verizon Communications Inc. (VZ) shed 2.8% after about 45,000 workers went out on strike over the weekend due to a contract dispute.

McDonald's Corp. (MCD) shed 2.3% despite posting a 5.1% gain in same-store sales for July that reflected growth in all regions.

Berkshire Hathaway Inc. (BRKA) fell 1% after Warren Buffett's company reported second-quarter operating earnings declined from last year, as the company's insurance operations suffered a loss.

TransAtlantic Holdings Inc. (TRH) was one of the few bright spots in Monday's stock-market action. Buffett's Berkshire Hathaway became the third company in recent months to bid for the reinsurer, helping its stock advance 5.8% as of midday. Read More