The stock market has experienced one of the great rallies of a generation, but for weeks there has been a nagging fear of bad news.

The news came this week from Dubai, the wealthy Middle Eastern city-state. Concerns that a government-backed investment company risked defaulting on $60 billion in debt ripped through world markets and served as a reminder of how fragile the financial system remains a year after it nearly collapsed.

The Dow Jones industrial average slumped nearly 155 points yesterday before trading ended three hours early due to the Thanksgiving holiday. The Dow had fallen as much as 233 points. The day's broad retreat from riskier assets pushed Treasury prices higher. The dollar gained against most other major currencies, and commodities tumbled.

European stocks fell sharply Thursday while U.S. markets were closed for Thanksgiving. That prompted a steep drop in the U.S. markets yesterday. Europe regained some of its losses yesterday.

Stocks ended well off their lows, but analysts cautioned that the shortened trading day and scarcity of investors meant the real test for the markets would come next week as traders return from long weekends.

The Dow fell 154.48, or 1.5 percent, to 10,309.92. The broader Standard & Poor's 500 index fell 19.14, or 1.7 percent, to 1,091.49, and the Nasdaq composite index fell 37.61, or 1.7 percent, to 2,138.44.

The Russell 2000 index of smaller companies fell 14.98, or 2.5 percent, to 577.21.

European markets, which fell more than 3 percent Thursday, closed higher yesterday after an early slide. Britain's FTSE 100 rose 1 percent, Germany's DAX index rose 1.3 percent, and France's CAC-40 advanced 1.2 percent.

In Asia, Japan's Nikkei stock average slid 3.2 percent. Hong Kong's Hang Seng index tumbled 4.8 percent. South Korea's benchmark dropped 4.7 percent.

The worries about Dubai erupted amid a period of relative calm in U.S. markets. The Chicago Board Options Exchange's Volatility Index, known as the market's fear index, rose more than 4 percent. On Wednesday it fell to its lowest level since August 2008 after jumping to a record in October last year around the height of the financial crisis. A drop in the VIX signals that investors aren't as worried about big swings in the market.

The latest test of the market still leaves major stock indicators up more than 4 percent for the month, so analysts said some selling was due. The S&P 500 index is up 61.3 percent from a 12-year low in March.

Trading volume in November has been light as many professional investors have pulled back from markets in hopes of locking in big gains for 2009.

Dave Rovelli, managing director of trading at brokerage Canaccord Adams in New York, said investors had been too quick to assume that the financial markets were on the mend.

"We're way ahead of ourselves in this market," he said. "We're in the eye of the storm now and we've been in it since March. Now we're in the back end of the storm."