The S&P/TSX composite index dropped 89.76 points to 12,187.36 amid a string of disappointing economic data.
The Canadian dollar was off 0.03 of a cent to 98.34 cents US as Statistics Canada reported that manufacturing sales fell 2.4 per cent in April to $48.2 billion.
It’s the fourth decline in five months and the largest monthly percentage drop since August 2009.
The agency says lower sales in the petroleum and coal product and primary metal industries were largely responsible for the decline.
U.S. indexes were also in the red amid signs of a weakening American manufacturing sector and consumer sentiment.
The Dow Jones industrials dropped 105.9 points to 15,070.18 as May industrial production was flat. Economists had expected a 0.3 per cent increase after production fell by 0.5 per cent in April.
And the University of Michigan's consumer confidence index came in at 82.7, well below expectations that it would remain at a five year high of 84.5.
The Nasdaq was down 21.81 points to 3,423.56 and the S&P 500 index gave back 9.63 points to 1,626.73.
Concerns about Fed intentions have weighed on markets since late last month. That's when Fed chairman Ben Bernanke said that the Fed might pull back on its US$85 billion-a-month bond-buying program, known as quantitative easing, if economic data improves, especially hiring.
The QE program has underpinned a strong rally on U.S. markets.
The Fed holds its next regularly scheduled meeting on interest rates next Tuesday and Wednesday and wraps up with a news conference by Bernanke.
Hopes for more details were fuelled Thursday by a Wall Street Journal story that suggested Bernanke will likely use next week’s meeting to try to calm market worries that the central bank is in a hurry to moderate its bond purchases.
"I think (the nervousness) is a reflection of the amount of leverage that is in the market that there’s a lot of speculators," said Norman Raschkowan, North American strategist with Mackenzie Financial Corp.
"It's no longer the big New York banks that are leveraged up and speculating, it’s foreign investors, it’s hedge funds, it's whoever. And that's why any time one of the Fed governors sneezes, there’s someone who is panicking because they’ve got this leveraged position that's in danger of going under water."
Nervousness about Fed intentions helped push TSX down 186 points or 1.5 per cent last week while the Dow industrials fell 178 points or 1.17 per cent.
The base metals sector led decliners, down 2.33 per cent as July copper was up two cents to US$3.20 a pound. First Quantum Minerals (TSX:FM) gave back 56 cents to C$16.91 while Teck Resources (TSX:TCK.B) shed 82 cents to $23.93.
Techs were also weak, down 1.25 per cent with CGI Group (TSX:GIB.A) down 71 cents to $30.05.
The gold sector was off about 1.5 per cent as August bullion rose $9.80 to US$1,387.60 an ounce. Goldcorp Inc. (TSX:G) faded 71 cents to $28.21.
The telecom sector added to a string of losses, down 0.85 per cent.
Speculation about cutting back on the QE program has had the effect of pushing U.S. Treasury yields sharply higher, which in turn has had a negative effect on TSX interest-rate sensitive sectors such as real estate, utilities, telecom and pipelines.
But Canada's telecom sector has also been pressured after Ottawa quashed the idea that big telecoms could take over the spectrum of smaller players. Federal Industry Minister Christian Paradis said current rules would stand, leading to Telus to abandon its plan to buy Mobilicity.
BCE Inc. (TSX:BCE) gave back 47 cents to $44.16 while Rogers Communications (TSX:RCI.B) dropped 54 cents to $45.35.
Financials shed 0.74 per cent with TD Bank (TSX:TD) down 92 cents to $81.32.
The July crude contract on the New York Mercantile Exchange ahead $1.16 to US$97.85 a barrel. The energy sector was off 0.53 per cent. Suncor Energy (TSX:SU) was down 36 cents to C$30.96.
Utilities were ahead 0.63 per cent following a string of losses. Speculation about cutting back on the QE program has had the effect of pushing U.S. Treasury yields sharply higher, which in turn has had a negative effect on TSX defensive/interest-rate sensitive sectors such as REITS, utilities, telecom and pipeline stocks.
Fortis Inc. (TSX:FTS) gained 70 cents to $33. On Thursday, New York regulators cleared the way for Fortis Inc. to buy CH Energy Group, the parent of Central Hudson Gas and Electric Corp. in a deal valued at US$1.5 billion.