By Chuck Mikolajczak

Microsoft Corp's stock fell nearly 12 percent at one point in the session to its lowest level since 1998 and was among the top drags on both the Dow and Nasdaq, after the world's largest software maker said it would cut up to 5 percent of its estimated work force over the next 18 months. The company cautioned that it could no longer offer profit forecasts for the rest of the fiscal year after posting a quarterly profit that fell short of expectations. The tech bellwether shook up Wall Street by releasing its earnings before the opening bell, instead of after the close as expected.

"There's just no good news out there. Microsoft pulled the rug out from under us," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

"Wall Street hates surprises -- don't surprise us like that."

Wall Street briefly pared losses late in the session after comments from the White House that it is committed to moving as quickly as possible on a stimulus package and that President Barack Obama's administration will do everything possible to restore growth and normalize the markets.

The Dow Jones industrial average <.DJI> fell 105.30 points, or 1.28 percent, to 8,122.80. The Standard & Poor's 500 Index <.SPX> dropped 12.74 points, or 1.52 percent, to 827.50. The Nasdaq Composite Index <.IXIC> slumped 41.58 points, or 2.76 percent, to 1,465.49.

Microsoft traded as low as $17.07, the lowest price since January 1998, and its largest percentage drop since November 2000. Microsoft ended Nasdaq trading down 11.7 percent at$17.11.

The U.S. economy showed further signs of deterioration on Thursday as initial weekly claims for jobless benefits rose to a seasonally adjusted 589,000, and housing starts sank 15.5 percent to a seasonally adjusted annual rate of 550,000 units -- the lowest on record.

Adding to concerns in the financial sector, former Merrill Lynch & Co Chief Executive John Thain is leaving Bank of America Corp , which recently acquired Merrill, a Bank of America spokesman said. His departure, which is effective immediately, came less than a week after Bank of America took $20 billion of government capital to help absorb Merrill's losses.

Bank of America's stock stumbled 14.5 percent to $5.71.

Investors were not appeased by the Senate Finance Committee's backing of Timothy Geithner, President Barack Obama's nominee for U.S. Treasury secretary. The panel's approval cleared the way for a full Senate confirmation vote.

However, the process could be delayed until next week if Republicans object.

"We are basically leaderless in Treasury," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. "It's an overhang right now and we need some leadership."

Geithner is widely expected to be confirmed by the Senate as one of Obama's leading players on the team that will tackle the U.S. recession.

Shares of long-term disability insurer Aflac Inc lost more than a third of their value after a Morgan Stanley analyst expressed concern about the company's holdings of hybrid securities issued by European financial institutions.

Aflac plunged nearly 37 percent to $22.90 on the NYSE.

In contrast to Microsoft, Apple Inc shares rose 6.7 percent to $88.36 on Nasdaq a day after the iPhone maker reported stronger-than-expected earnings and gave a solid outlook for the current quarter, despite the weak economy.

Trading volume was moderate on the New York Stock Exchange, with about 1.56 billion shares changing hands, slightly above last year's estimated daily average of roughly 1.49 billion, while on Nasdaq, about 2.31 billion shares traded, roughly equal to last year's daily average of 2.28 billion.

Declining stocks outnumbered advancers on the NYSE by a ratio of 7 to 2, while on the Nasdaq, about three stocks fell for every one that rose.

(Additional reporting by Rodrigo Campos; Editing by Jan Paschal)