Stocks slide on more concerns about financials

The market was treading water for much of the session, then tumbled in early afternoon as concerns about financial companies intensified. Reports that Lehman Brothers Holdings Inc. planned to raise $4 billion in capital later expanded into a rumor on trading desks that the investment bank approached the Federal Reserve to borrow money.

Lehman Treasurer Paolo Tonucci quickly refuted the speculation, but the damage had already been done. Lehman dropped as much as 14.5 percent, and dragged down other banks and brokerages and ultimately the rest of the market along with it.

"This market's very jittery and nervous, and a lot of times you'll see wild moves, wild gyrations, when it's driven by rumors and innuendo," said Jim Herrick, manager of equity trading at Baird & Co., who added that the rumors reminded investors of Bear Stearns' near-collapse in March.

The Lehman rumors followed a spate of bad news about other financial companies on Monday, including a downgrade of the nation's four biggest investment banks by rating agency Standard & Poor's. Separately, anxiety about weak May auto sales figures and fresh concerns about inflation also cut into investor appetite for stocks.

The Dow fell 100.97, or 0.81 percent, to 12,402.85, after being down more than 160 points earlier.

Broader market indexes were also lower. The Standard & Poor's 500 index dropped 8.02, or 0.58 percent, to 1,377.65, while the Nasdaq composite index fell 11.05, or 0.44 percent, to 2,480.48.

Early in the session, comments from Federal Reserve Chairman Ben Bernanke seemed to support the market. In a speech via satellite to a conference in Barcelona, Spain, the Fed chief reiterated expectations the economy will rebound during the second half due to interest rate cuts, Fed loans to banks and tax rebates.

But he also said the economy faces headwinds with rising prices for food and energy--a signal that interest rates will remain on hold. Inflation-weary investors are wrangling with record oil and gasoline prices, which last month peaked at $135.09 a barrel.

Though oil has since retreated, the fear is that higher energy costs are already hurting strapped consumers whose spending accounts for more than two-thirds of economic growth. Light, sweet crude for July delivery fell $3.45 to settle at $124.31 a barrel on the New York Mercantile Exchange.