Stocks tumbled after a survey of service industries pointed the economic barometer firmly toward recession.

The Dow Jones industrial average plunged 370 points, or 2.9 percent, after the Institute of Supply Management's service sector index contracted last month for the first time since March 2003.

The S&P 500 shed more than 3 percent of its value today to record its worst performance year-to-date in its history. The index is down 8.9 percent since the start of the year, and it's off 14.6 percent from its October high.

The service sector index came in at 44.6 in January, compared with 54.4 in December. A reading above 50 indicates expansion, while one below shows a contraction.

It was the sharpest one-month decline in the history of the index, and brings it to levels not seen since the last recession.

"The recession has indeed arrived," Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vermont, told Reuters.

Fears of a recession were underscored after Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said in a speech this afternoon that a "mild recession" was possible.

"My sense is that the most likely path is sluggish growth in the near term," he said.  "But I can also see the possibility of a mild recession, similar to the last two we have experienced—in other words, shallow and with a slow recovery. What I don't expect is a more severe recession, like those we saw in 1982 or 1974."

The I.S.M. report caught the market off guard for several reasons. For one, it was released an hour earlier than usual because the institute was concerned that it might leak. It is also a revamped index, weighing equally the components of activity, new orders, employment, and supplier deliveries. And it is a survey, reflecting present confidence or lack thereof, and not future plans.

Still, the weakness in the report was evident.

"The I.S.M. index fell off a cliff," Peter Cardillo, chief market economist at Avalon Partners, told MarketWatch. "It's one more piece of bad news on the economy, adding to the credit woes, the downgrades, and the political arena heating up."

The institute said, "Members' comments in January indicate that weakness in the economy coupled with increased costs have negatively affected their business. Members have also indicated that they are experiencing inflationary pressures."

Of the 18 service industries tracked by the institute, only three reported growth: utilities; professional, scientific, and technical services; and education.

About the only voice of optimism today came from Treasury Secretary Henry Paulson, who testified before the Senate Finance Committee and said he does not see the economy falling into recession. "The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy," he said. "I believe our economy will continue to grow, although at a slower pace than we have seen in recent years."