NEW YORK -- Wall Street plunged Tuesday after the Federal Reserve lowered interest rates by a quarter point, disappointing investors who hoped the central bank would move more aggressively to help the economy overcome the credit and mortgage crisis. The Dow Jones industrial average skidded more than 290 points.

Investors had been expecting policymakers would lower rates for a third straight time, though there was debate over the size of the cut. Most economists anticipated a quarter-point reduction in the benchmark federal funds rate to 4.25 percent, but some investors were hoping for a half-point cut from the Fed's final meeting this year and their disappointment took the market sharply lower.

Wall Street had barreled higher the past two weeks, propelling the Dow up 640 points partly on rising optimism that the Fed would do all it could to prevent the economy from slipping into recession. While the Fed indicated Tuesday it was doing exactly that, the market's expectations had run well ahead of the central bank's view of the economy and what it needed.

The Fed also lowered its discount rate, the interest it charges banks for loans, by a quarter point to 4.75 percent, making it easier for banks to obtain the cash they need for year-end obligations. Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen, but that was not enough to assuage the market.

The central bank did note that the economy has suffered but stood firm on a quarter-point cut for now, saying it believed the steps it has taken "should help promote moderate growth over time."

"Time will tell if this restores enough confidence in the system. They're saying that this with the other cuts that we have done should promote growth over time. It's a telegraph that we think this is a sufficient move to alleviate the stresses on the market," said Bill Knapp, economist and chief investment strategist for MainStay Investments, a division of New York Life Investment Management.

The Dow fell 294.26, or 2.14 percent, to 13,432.77 after dropping as much as 313.29.

Broader indexes also fell. The Standard & Poor's 500 index fell 38.31, or 2.53 percent, to 1,477.65, and the Nasdaq composite index fell 66.60, or 2.45 percent, to 2,652.35.

Declining issues outpaced advancers by more than 5 to 1 on the New York Stock Exchange, where consolidated volume came to 3.97 billion shares compared with 2.81 billion shares traded Monday.

Bond prices rose sharply. The 10-year Treasury note's yield, which moves opposite the price, fell to 3.97 percent from 4.16 percent late Monday. Gold prices fell while the dollar was mixed against other major currencies.

Oil prices rose, but came off of earlier highs after the Fed's decision. Investors had hoped a deeper cut would help spur the U.S. economy and drive demand from the world's biggest consumer of oil. Light, sweet crude for January delivery rose $2.16 to settle at $90.02 per barrel on the New York Mercantile Exchange.

Knapp said also that a half-point cut in the fed funds rate could have stirred fears of inflation, a primary concern for the Fed. But he said the Fed "didn't go as far as they should have," in lowering the discount rate.

The Fed uses what's known as the discount window to lend directly to banks in order to quickly inject liquidity directly into the banking system -- essentially greasing the wheel themselves to prevent the credit markets from freezing up.

Bruce McCain, head of the investment strategy team at Key Private Bank, said the Fed doesn't want to cut too aggressively because it has to buy time for its previous rate cuts to fully work their way into the economy -- a process that usually takes months.

"I think they felt they could hold back, they could minimally meet the expectations and have a little more latitude down the road but in this case it just didn't work," McCain said. "They have to make sure that the market doesn't get so rattled that sentiment in some senses doesn't spin out of control and businesses and consumers stop spending out of fear."

The Fed's rate decision and Wall Street's disappointment followed further word of trouble in the banking sector. Washington Mutual Inc. became the latest lender to resort to a massive stock sale to shore up its finances. WaMu's plan to sell $2.5 billion worth of convertible preferred stock follows a move by Switzerland-based UBS AG to sell $11.5 billion in shares to Singapore's sovereign wealth fund and an unidentified Middle Eastern investor.

Washington Mutual shares fell $2.46, or 12.4 percent, to $17.42 after the nation's largest savings and loan also said it will close offices, lay off more than 3,000 workers, and slash its dividend. The bank also set aside up to $1.6 billion for loan losses in the fourth quarter.