U.S. stocks fell in choppy trade and the Nasdaq slid to a fresh 6 and 1/2-year low on Monday as shares of the biggest drugmakers fell after Merck's proposed a $41 billion takeover of Schering-Plough .

Large mergers and acquisitions are generally viewed as a show of support for equity valuations. But analysts said with major indexes trading around 12-year lows, evidence of thawing credit markets and economic recovery is needed to bring investors back into the market.

The deal between the two companies also comes at an uncertain time for the pharmaceutical industry after it failed to produce enough new drugs to replace old ones and the administration of U.S. President Barack Obama prepares health-care reforms that could pressure drug prices.

Investors got news of another large acquisition late in the day with Dow Chemical Co agreeing to go through with its purchase of Rohm and Haas Co . The companies reached a settlement as the two sides were set to face off in court over Dow's refusal to close the deal.

Shares of Rohm and Haas shot up 4.7 percent to $77.47 in extended trade, while Dow Chemical's shares dropped 10 percent to $5.70.

Pharmaceuticals were among the top drags on the Dow industrials, with Merck down 7.7 percent at $20.99, Johnson & Johnson shedding 2.9 percent to $46.60 and Pfizer
slipping 0.8 percent to $12.63. But Schering-Plough shares jumped 14.2 percent to $20.13 on news of the deal.

When you start seeing folks further down the food chain doing things, that's when you can start getting excited about the general economy and we're definitely not there yet, said Cummins Catherwood, managing director at Boenning and Scattergood in West Conshohocken, Pennsylvania.

It's a sign of light, he added. (But) these guys are big leaguers and they've got solid balance sheets and the ability to raise the money necessary.

The Dow Jones industrial average <.DJI> dropped 79.89 points, or 1.21 percent, to 6,547.05. The Standard & Poor's 500 Index <.SPX> fell 6.85 points, or 1.00 percent, to 676.53. The Nasdaq Composite Index <.IXIC> slid 25.21 points, or 1.95 percent, to 1,268.64.


The Dow is down 7.3 percent for the month and off 25.4 percent for the year so far. The blue-chip average has been unable to post gains in consecutive sessions since the most recent back-to-back gains on February 5-6.

Big technology stocks pulled the Nasdaq down to its lowest close since October 2002.

Google's stock fell 5.7 percent to $290.89, which at its current pace will be its fifth straight weekly slide and mark its longest losing streak in more than a year.

The Amex Biotechnology index <.BTK> fell 3.9 percent.

Financial stocks were a bright spot, rising as investors bet on the potential for more clarity from Washington on plans to shore up the banking system. U.S. Federal Reserve Chairman Ben Bernanke attended a meeting on the economy with U.S. President Barack Obama, the White House said.

Shares of Bank of America surged 19.4 percent to $3.75 and Wells Fargo & Co jumped nearly 16 percent to $9.97. An S&P financial index <.GSPF> was up 2.5 percent.


Investment bank Merrill Lynch said the S&P 500 stock index is likely to bottom at 600 points in October, with financial stocks pointing the way out of the current bear market six months ahead of that.

Also weighing on investor sentiment were comments from billionaire investor Warren Buffett, who said in an interview on CNBC television, the current environment was an economic Pearl Harbor. But he added that over a 10-year period, investors will do considerably better owning a group of equities rather than U.S. Treasury securities.

Trading was moderate on the New York Stock Exchange, with about 1.56 billion shares changing hands, slightly above last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.07 billion shares traded, below last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on both the NYSE and the Nasdaq by about 5 to 2.

(Additional reporting by Leah Schnurr)