By Chuck Mikolajczak

Two days ahead of the key U.S. nonfarm payrolls report for December, a grim private-sector jobs report highlighted the challenges facing President-elect Barack Obama as he makes plans for a large stimulus package to energize the economy.

Recession fears were heightened after Intel issued its second revenue warning for the fourth quarter since November, citing weakening demand for personal computers. The technology bellwether was among the main laggards on the Nasdaq.

The Intel news compounded negative sentiment stemming from aluminum producer Alcoa's announcement late Tuesday it would cut more than 15,000 jobs, halve capital spending and sell businesses to weather the global downturn.

"It all of a sudden hit everyone that it's preannouncement season and it's impossible to forecast in a recession," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

"When reality hits it can shock people."

The Dow Jones industrial average was down 249.14 points, or 2.76 percent, to 8,765.96. The Standard & Poor's 500 Index slid 27.58 points, or 2.95 percent, to 907.12. The Nasdaq Composite Index tumbled 55.21 points, or 3.34 percent, to 1,597.17.

Energy shares slid after inventory data showed U.S. crude oil and refined product supplies rose more than expected last week, with demand eroded by the economic slowdown. U.S. crude futures slumped some 12 percent to below $43 a barrel.

Chevron and ExxonMobil were the primary weights on the Dow, while the S&P index of energy stocks tumbled 4.3 percent. Chevron lost 4.5 percent to $73.84, while Exxon shed 3 percent to $77.87.

After five days of gains, technology shares were among the biggest weight on the market after Intel's warning, indicating the heavy toll from the economic slump on both business and consumer spending.

Intel shares fell 5.3 percent to $14.56 on the Nasdaq, while Apple stock lost 2.5 percent to $90.65 and Microsoft shed 5.2 percent to $19.68.

The S&P 500 index of technology shares fell 3.6 percent and the semiconductor index was down 4.9 percent.

Further evidence of the spreading recession came from media company Time Warner Inc, which forecast a fourth-quarter loss, sending its stock down 6.3 percent to $10.29.

According to ADP, a private employment service, U.S. private employers shed 693,000 jobs in December, up sharply from the revised 476,000 jobs lost in November and far more than economists estimated.

Among financials, Morgan Stanley fell 8 percent and Goldman Sachs dropped 4.3 percent after Sanford Bernstein cut its 2009 earnings forecast for both firms. The S&P Financial index shed 4.2 percent.

Obama, set to be sworn in on January 20, has proposed the largest U.S. infrastructure investment since the 1950s and massive tax cuts for consumers and businesses.

The new U.S. Congress began work to pass a stimulus package. Obama expects to inherit a budget deficit approaching $1 trillion and says his administration will have to make tough budget choices.

The benchmark S&P 500 has risen 21 percent since its November 21 low.

(Editing by James Dalgleish)