Washington - Two US stock indices dropped more than 3 per cent in early morning trading Thursday, pulled down by a jump in interbank borrowing costs and reports of a worsening economy.

The decline came despite the vote of confidence by the US Senate late Wednesday for a second version of the finance rescue plan.

The US House of Representatives is to vote on Friday for the version after dealing a stunning defeat to the first version on Monday and sending stocks in a 7-per-cent-plus dive.

The credit crunch has tightened, Bloomberg financial news service reported. The cost of borrowing in dollars in London for three months rose for a fourth day, signaling continuing uncertainty in the all-important interbank lending system that fuels the commercial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 per cent, the highest since January 11.

The US government said jobless claims increased to a seven-year high and factory orders slumped more than forecast. General Electric Co. shares lost 9.4 per cent after selling 12.2 billion dollars in shares at a discount.

Monsanto Co. slid 17 per cent, its steepest loss in five years, after Merrill Lynch & Co. said slumping demand will hurt farm companies.

"There's a liquidity crisis going on that's putting investors on edge," Alan Gayle of Ridgeworth Investments in Richmond, Virginia, was quoted as saying. "Liquidity is like oxygen. Lack of it can cause serious damage in a very short time."

The broad-based Standard & Poor's 500 Index slid 38.28, or 3.30 per cent, to 1,122.78, at 1520 GMT. The blue chip Dow Jones Industrial Average lost 296.28 points or 2.74 per cent, to 10,534.78. The Nasdaq high tech index slipped 67.19 points or 3.25 per cent, to 2,002.21. (dpa)