U.S. stocks tanked early Thursday, following a 7.3% plunge in Japan stocks, but then reversed course and benchmark indexes ended only modestly lower for the day.

The Dow Jones industrial average sank more than 125 points after the opening bell but trimmed those losses considerably by the close, shedding 12 points on the day. Helping to boost the Dow were two positive economic reports and a 14%-plus surge in shares of Hewlett Packard, a Dow component.

The broader Standard & Poor's 500 had slid 1.2% earlier and the tech-laden Nasdaq composite index had dropped more than 1% at the open. But those earlier declines were erased by optimism about PC giant HP reporting better-than-expected quarterly results late Wednesday.

The Dow and Nasdaq lost 0.1% for the day; the S&P 500 ended down 0.3%.

STOCKS: Sell-off sends investors out of risky stocks

Several reasons were blamed for what might be a turn in investor sentiment. A weaker-than-expected manufacturing report out of China reignited fears that its once rapidly growing economy is at risk of contracting. In Japan, which relies on imports to China for much of its growth, bond yields spiked above 1%, a two-year high. Across Asia and in Europe, shares sank.

Global investors were also rattled after mixed messages from the Federal Reserve Wednesday about when it may pull back on its $85 billion a month bond purchases aimed at stimulating the U.S. economy. In short, uncertainty over the timing of the Fed's next move seems to be giving investors a reason to sell and take profits.

WEDNESDAY: Stocks plunge as Fed minutes hit at cutback

Market watchers are speculating whether the euphoria that has gripped many investors this year may be dissipating. The drop in Japan's Nikkei 225 index was the biggest one-day drop since Japan was hit by a devastating tsunami more than two years ago. If the Dow were to drop 7.3% in one day, it would be a 1,117-point decline.

"Risky assets have been shaken by concerns that the Fed tapering could take place in the near future," Koon Chow, an analyst at Barclays told clients in a early-morning research note, adding that China manufacturing data out Thursday worsened global growth fears.

In written testimony given Wednesday to congressional lawmakers, Fed chairman Ben Bernanke appeared to signal that the central bank was not yet ready to change its "easy money" policies. But his subsequent comments — and the minutes of the last rate-setting meeting — triggered concerns that the pace of bond buying, aimed at slashing borrowing rates and boosting job creation, could slow later this year.

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What's happening could be signaling the market is at an "inflection point" after a strong rally to start the year, Gary Kaltbaum of Kaltbaum Capital Management said Thursday.

"Froth has really picked up," says Kaltbaum. "Markets have become stretched and extended beyond the norm. ... in the near term, we think this latest move (up) may have run its course."

The upbeat economic news Thursday: Initial claims for unemployment benefits fell 23,000 the week ended May 16 to 340,000, near a five-year low, the Labor Department said. And the median price of a new home hit a record high as sales of new homes in April rose to the second-highest level since the recession ended, the Census Bureau said.

But investors seemed more focused on fears about China's growth. After bond yields spiked in Japan, the yield on the benchmark 10-year Treasury note jumped to 2%, a two-month high -- suggesting a move to safer assets. In afternoon trading, the yield, which moves inversely to the price, slipped back to 1.95%.

The benchmark New York rate for crude oil dropped 0.4% to about $93.85 a barrel after trading above $97 a barrel earlier in the week. Investors who take cover in gold when financial markets are roiled, boosted the precious metal's price 1.4% to about $1,386 an ounce.

In Europe, benchmark indexes closed sharply lower but rebounded off the lows of the trading session. Britain's FTSE 100 index finished down 143.48 points, 2.1% lower, to 6,696.79. Germany's benchmark DAX 30 index closed down 178.91 points, off 2.1%, to 8,351.98, while the CAC-40 index in France ended down 83.96 points, a drop of 2.1%, to 3,967.15.

"The fact that the equity markets fell so hard on these headlines overnight indicates that perhaps investors have been guilty of too much exuberance in recent months," said Jane Foley, an analyst at Rabobank International.

Some sort of decline in global indexes had been anticipated following a stock run that's seen many benchmark indexes break records week after week this year. Much of the recovery in global stock markets over the past few years has had its roots on the extra liquidity that's flown through financial markets as a number of central banks, particularly the Fed, have pursued stimulus programs.

"The mood has switched from greedy to fearful," said Chris Beauchamp, market analyst at IG.

The Nikkei has been the best-performing major index this year, up 45% — before Thursday's loss — to five-year highs. The Nikkei has been buoyed by the announcement of an aggressive monetary stimulus from the Bank of Japan, which has piled the pressure on the yen. That development is a potential boon to the country's exporters and therefore to growth.

Many in the markets blamed the Nikkei's fall on the spike in Japan's benchmark 10-year bond to above 1% for the first time in a year. That unnerved investors at a time when Japan's already overburdened government finances are vulnerable to rises in interest rates. The interest rate, or yield, later slipped back to about 0.9%.

The sell-off is a reminder of Japan's vulnerability as Prime Minister Shinzo Abe tries to end two decades of stagnation with unprecedented monetary easing, increased government spending and reforms to make the world's No. 3 economy more competitive.

In China, the Shanghai Composite Index lost 1.2% to 2275.67, its biggest fall in a month while the smaller Shenzhen Composite Index shed 0.7% to close at 1014.47. Hong Kong's Hang Seng slumped 2.5% to 22,669.68. South Korea's Kospi lost 1.2% to 1,969.19. Australia's S&P/ASX 200 dropped 2% to 5,062.40.

In the currency markets, the yen was the main mover following the rise in Japanese yields. The yen has bounced back strongly, after falling to near five-year lows against the dollar on Wednesday. The dollar was trading 1.65% lower at 101.425 yen, having earlier fallen to a low of 100.86 yen. The euro gained 0.7% against the dollar, up to 1.29.

Contributing: USA TODAY's Rachel Huggins, The Associated Press