By Rodrigo Campos

Microsoft Corp's stock fell as much as 11 percent to the lowest since 1998 and was among the biggest drags on the Dow and the 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. Microsoft warned that it could no longer offer profit forecasts for the rest of the fiscal year after reporting a quarterly profit that fell short of expectations. The tech bellwether further shook up Wall Street by releasing its earnings before the opening bell, instead of after the close as expected.

"Coming into some OK earnings numbers from IBM and Apple, it was thought that Microsoft at least would follow suit," said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois.

"It was always seen that the tech area was one of pretty good growth and was somewhat immune to the business cycle."

Microsoft traded as low as $17.19, the lowest price since January 1998.

Energy stocks also dove in sync with falling crude oil prices, with Exxon Mobil down 2.8 percent at $77.07 and Chevron down 3.3 percent at $68.86. Both dragged on the Dow.

Stock prices and crude oil futures had been pressured earlier in the session as data showed the U.S. recession has yet to hit a trough.

The Dow Jones industrial average <.DJI> fell 207.33 points, or 2.52 percent, to 8.020.77. The Standard & Poor's 500 Index <.SPX> slid 20.71 points, or 2.46 percent, to 819.53. The Nasdaq Composite Index <.IXIC> tumbled 47.06 points, or 3.12 percent, to 1,460.01.

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, effective immediately, a Bank of America spokesman said. His departure 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 slid 14 percent to $5.76.

Shares of long-term disability insurer Aflac Inc lost almost 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 32 percent to $24.71 on the NYSE.

Investors were not calmed 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 that could be brought to the floor later on Thursday.

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.

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.

NYMEX crude futures fell more than 6 percent, or $2.70 per barrel, following the U.S. government's oil inventory report that showed crude oil and gasoline supplies rose more than expected last week and an unexpected build in distillate supply.

On the bright side, Apple Inc shares rose 8.1 percent to $89.52 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.

(Additional reporting by Leah Schnurr; Editing by Jan Paschal)