Stocks slid on Monday on worries about the sustainability of recent better-than-expected results from banks following Bank of America Corp's report of a big increase in troubled loans.

Dow component Bank of America shares fell 16.6 percent to $8.84 despite reporting a rise in profits after it said that its credit quality deteriorated markedly.

Weighing further on banks' share prices, U.S. government officials have determined they can avoid asking Congress for more bank bailout funds by converting the existing loans to some U.S. banks into common stock, the New York Times reported. Such a move would dilute stockholders' stakes.

Shares of Citigroup Inc lost 16.2 percent to $3.06 after analysts at Goldman Sachs said credit losses at the bank continued to grow at a rapid rate and estimated the bank's underlying first-quarter loss was 38 cents a share.

The KBW bank index <.BKX> tumbled 10.5 percent.

Bank of America came out with numbers (and) everyone is sort of catching up with this game now and people are not believing these numbers. They don't believe the (bank's CEO) Ken Lewis when he says that he doesn't need to raise more capital, said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

The market is waking up to the fact that financial companies are not yet out of the woods.

The Dow Jones industrial average <.DJI> tumbled 231.06 points, or 2.84 percent, to 7,900.27. The Standard & Poor's 500 Index <.SPX> lost 30.34 points, or 3.49 percent, to 839.26. The Nasdaq Composite Index <.IXIC> shrank 59.76 points, or 3.57 percent, to 1,613.31.

The S&P 500 is up 24 percent from the bear market close in early March after a six-week rally spurred by some positive comments from banks and hopes that data signaled the economic slump may be moderating.

On Friday, the broad index marked its longest weekly winning streak since 2007, while the Dow racked up its largest six-week gain since July 1938.

Adding to the negative tone, U.S. President Barack Obama said over the weekend that the economy remains under strain and his top economic adviser tempered hopes for a speedy recovery.

On the mergers and acquisitions front, Oracle Corp was among the top drags on the Nasdaq after it said it would buy Sun Microsystems Inc for about $7.4 billion after Sun's talks with IBM broke down earlier this month.

Oracle shares fell 2.5 percent at $18.58, while Sun, the high-end computer server and software maker, surged 36 percent to $9.10.

Shares of PepsiCo Inc's
two largest bottlers, Pepsi Bottling Group
and PepsiAmericas Inc
, gained more than 20 percent each after the U.S. soft-drink maker offered $6 billion to buy the remaining stakes in both companies.

(Reporting by Rodrigo Campos)