(Reuters) - U.S. stocks fell sharply on Friday, with the Dow Jones industrial average dropping by as much as 605 points, as Britain's vote to quit the European Union roiled global financial markets.
[caption id="attachment_143862" align="alignright" width="399"]
Traders work on the floor of the New York Stock Exchange (NYSE) after the opening bell. REUTERS/Lucas Jackson[/caption]
The S&P 500 index and the Dow posted their biggest intraday losses in more than five months and the Nasdaq staged its biggest intraday drop in more than four months before clawing back some ground in late morning trading.
All three indexes were headed for their second weekly decline in a row.
"Markets clearly got it wrong and were obviously, to use the British term, 'gobsmacked' by the result," said Aaron Clark, portfolio manager at GW&K Investment Management in Boston. "Investors are shooting first and will ask questions later."
Investors worried about the outlook for the world economy sought refuge in the dollar and other safe-harbor assets such as gold and U.S. Treasury bonds, while dumping riskier shares. The yield on the U.S. 10-year bond hit its lowest since 2012.
Bank stocks were among the biggest losers. U.S. banks have big London operations.
The CBOE Volatility Index - known as Wall Street's fear gauge - was up 20.35 percent at 20.76 in late morning trading. The index had earlier surged as much as 52.11 percent to 26.24, its highest since February.
"The U.S. equity markets will see selling today but could see a bit of a rebound after the initial knee-jerk reaction as global investors look for somewhere to invest," said Chris Gaffney, president at EverBank World Markets.
Britain's FTSE 100 stock index also recovered much of its early losses and was down 2.2 percent just before the close. Asian stocks also tumbled.
U.S. short-term interest rate futures rose amid speculation the Federal Reserve could cut interest rates to help shield the economy from any global fallout.
Investors have been waiting for the Fed to raise borrowing costs as the economy improves.
The Federal Reserve, which had earlier said a Brexit could have "significant repercussions" on the economic outlook, sought to calm markets on Friday by saying it was ready to provide dollar liquidity.
Amid the turmoil, sterling hit a 31-year low in its biggest intraday percentage fall on record and Prime Minister David Cameron said he would step down by October.
Oil prices, which are sensitive to changes in the economic outlook, dropped about 4 percent, the biggest fall since early February.
(Additional reporting by Yashaswini Swamynathan and Noel Randewich)