The S&P 500 has suffered its biggest drop since late September as the European Central Bank disappointed market hopes for greater stimulus.

The ECB move triggered a spike in the euro that caught investors by surprise on Thursday, forcing them to shift positions that hit most asset classes. Bond prices dropped after the announcement.

At the same time, the CBOE Volatility index, the stock market’s fear gauge, jumped 13.8 per cent, closing at its highest since November 17.

The ECB cut its deposit rate deeper into negative territory and extended its asset buys by six months, as expected. But some market participants had hoped for greater stimulus.

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All 10 S&P 500 sectors fell in a second day of sharp losses for US stocks. Healthcare ended down 2.2 per cent, leading the day’s decline in the S&P 500, followed by energy, down 2 per cent.

“The biggest influence was the (ECB President Mario) Draghi talk this morning; it didn’t satisfy the US markets,” Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia said.

Federal Reserve chairwoman Janet Yellen’s comments suggested the Fed was on track to raise interest rates this month. Yellen told lawmakers the US central bank was close to lifting its overnight interest rate from near zero.

She gave an upbeat view of the economy, saying “growth is likely to be sufficient over the next year or two to result in further improvement in the labour market”. The Fed’s next policy meeting is on December 15-16.

The Dow Jones industrial average fell 252.01 points, or 1.42 per cent, to 17,477.67, the S&P 500 lost 29.89 points, or 1.44 per cent, to 2,049.62 and the Nasdaq Composite dropped 85.70 points, or 1.67 per cent, to 5,037.53.

The S&P 500 posted its biggest daily percentage decline since September 28 and closed at its lowest since November 13. Some of the selling was related to leveraged funds that were likely forced to close positions as volatility spiked.

According to Bank of America research, these funds, which were heavily involved in the dramatic sell-off in late August, have since returned to the level of leverage they had prior to that downturn.

Volume was elevated in S&P 500 index options expiring on Friday, particularly in put options that suggest people were hedging against the possibility of losses, said Henry Schwartz, president of options analytics firm Trade Alert, in New York. “After a really slow week it does look like hedgers are taking some action today,” he said.

Data released on Thursday showed initial US jobless claims for last week rose but remained at levels consistent with a strengthening labour market.

Friday’s employment report is expected to show the US economy added 200,000 jobs in November. Zafgen shares were down 5.1 per cent at $5.96 after the company said the US Food and Drug Administration was putting on complete hold a late-stage study testing its experimental obesity drug.

Declining issues outnumbered advancing ones on the NYSE by 2,518 to 579, for a 4.35-to-1 ratio on the downside; on the Nasdaq, 2,159 issues fell and 674 advanced for a 3.20-to-1 ratio favouring decliners. The S&P 500 posted 9 new 52-week highs and 26 new lows; the Nasdaq recorded 53 new highs and 78 new lows.