NEW YORK - Wall Street got a reality check this week that U.S. investors remain vulnerable to global stock shocks, especially when they're followed by bad news on the home front.

U.S. stocks dropped to a three-month low, completing their worst week since January 2003. A decline in Asian stocks set things off, and a decline in U.S. consumer confidence - which magnified the risk profit growth will be wiped out by a recession - sent markets tumbling.

The Dow Jones industrial average dropped 416 points on Tuesday, and that was a rebound from a 546-point drop that day. Friday, stocks continued their fall, with the Dow losing 120 points as the yen rallied against the dollar and concerns about the U.S. economy still dogged investors spooked by Tuesday's huge drop.

The Nasdaq and the S&P 500 had their biggest weekly point drop since the week ended July 19, 2002. For the Nasdaq, it was the poorest weekly showing since the week ended Sept. 21, 2001, the first week of trading after the 9/11 terror attacks.

Until this week, the Dow had gone more than 45 months without a drop of more than 2 percent in a single session.

Investors have been rolling along for nearly four years as major market indexes flexed toward record levels. Low volatility, a steady increase in stock value and strong market fundamentals lulled investors into a false sense of security about their portfolios.

But all that changed with Tuesday's 9 percent drop in the Shanghai market, China's best-known index. Hours later, year-to-date gains in the Dow, Nasdaq and S&P 500 had been wiped out.

"This leaves us a little more vulnerable," said Jack Ablin, chief economist for Harris Private Bank. "The markets are integrated, they're global, and what we've come to learn is that a splash in China can create a tidal wave across the rest of the world."

That tidal wave certainly pummeled U.S. investors this week. A weak government report on durable goods didn't help, and comments from former Federal Reserve Chairman Alan Greenspan about signals of a U.S. recession further rattled traders.

Ablin, like other investors, said he was "surprised when (the Dow) fell 250, and by 500 I was stunned."

The correlation between global markets being more sensitive to each other, and a spike in volatility, becomes a double-edged sword for investors. It calls for them to take a new look at how much risk is in their portfolios and how to diversify into safer positions - but also creates opportunity.

Hedge funds managers have been among the biggest sellers this past week since they normally pull back when the markets become more volatile. This helps broaden the playing field for other retail investors and makes relatively cheaper markets more attractive.

Volker Dosch, head of U.S. equities for DWS Scudder Investments, said long-term investors stayed put as hedge funds bailed out of positions. He agrees this will create opportunity that gives retail investors a good entrance into the market.

Like others, Dosch said the choppiness of global markets now makes large-cap names - big multinational companies like the Dow stocks - more attractive. He believes the market could sharply rebound this year if the Fed "makes it easier on us investors" by lowering interest rates.

"Once market participants -really become convinced that the Fed is out of the way, then I think this should be good for the U.S. market," he said. "Large-caps should have better performance because of increasing uncertainty, a slowdown in the U.S. economy. It all makes for a convincing argument for them."

The fact Wall Street was thumped this week actually might have done many retail investors a favor. They had grown too used to fairly stable market conditions.

Until Tuesday's drop, the broad Standard & Poor's 500 index didn't have a 2 percent correction in 121 sessions. The Dow had enjoyed 31 record high closes since the beginning of October, and the Nasdaq composite climbed to six-year highs.

Diane Dercher, chief economist at Waddell & Reed, said investors are trying to sort through the myriad signals the markets have given off this week.

Movers

- Home Depot Inc. slumped for a 12th day as data this week showed new-home sales declined the most in a decade. Home Depot dropped 44 cents, to $39.01.

- Exxon Mobil Corp., the biggest energy company, led the Dow Jones industrial average lower on speculation a weakening economy will reduce oil demand. The stock fell 98 cents, to $70.01.

- Countrywide Financial Corp., said this week that almost one out of every five subprime borrowers was late on payments at the end of last year. Its shares slipped 42 cents, to $37.02.