Stocks fell on Monday after Citigroup's warning of billions more in loan losses compounded fears that the credit crunch could get worse.
The news sparked a sell-off in shares of other financial companies as investors questioned which among them would be the next to reveal damage from the meltdown in the U.S. housing and subprime mortgage markets.
The S&P financial index fell to a two-year low, while Citigroup's stock fell to its lowest in 4-1/2 years.
Citigroup executives were unable to assure investors on Monday that a potential $11 billion write-down for subprime mortgages won't grow, and the bank's nearly pristine credit rating was downgraded.
With the additional write-down commentary from Citigroup, that's weighed on all of the financials. People are not sure if there's another shoe to drop, said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.
The main move today has been preservation of capital and risk management if you have exposure to the financials, he said.
The Dow Jones industrial average fell 51.70 points, or 0.38 percent, to end at 13,543.40. The Standard & Poor's 500 Index slipped 7.48 points, or 0.50 percent, to 1,502.17. The Nasdaq Composite Index dropped 15.20 points, or 0.54 percent, to 2,795.18.
The market came off its lows late in the session after CNBC repeated a denial from Goldman Sachs Group Inc that the investment bank faced additional write-downs. A Goldman Sachs spokeswoman said the rumors of immediate, pending writedowns were not true.
The day's prominent decliners on the Nasdaq have been the stocks that led the recent tech rally, including Apple Inc, down 0.9 percent at $186.18, and Microsoft Corp, down 0.9 percent at $36.73.
Shares of Citigroup, the largest U.S. bank, whose chief executive, Charles Prince, quit on Sunday, dropped 4.9 percent to $35.90 and hit a low for the day of $35. At the low, Citi's stock was down as much as 7.2 percent.
Shares of Bank of America Corp, the No. 2 U.S. bank, declined 1.5 percent to $44.45.
Shares of Goldman Sachs slid 4.9 percent to $218.39. The S&P financial index fell 1.4 percent.
Several brokerages cut their price targets on shares of Citigroup, which said the write-offs could grow if markets worsened.
Merrill Lynch & Co's ouster of its chief executive last week and its $8.4 billion write-down put the credit crisis back in the spotlight. Merrill Lynch shares fell 2.4 percent to $55.88 on the New York Stock Exchange.
Stronger-than-expected growth in the vast services sector helped stocks trim losses early in the day.
Growth in the U.S. service sector accelerated in October for the first time in four months as new orders improved while prices eased, according to the Institute for Supply Management.
Trading was below average on the New York Stock Exchange, with about 1.53 billion shares changing hands, below last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.15 billion shares traded, ahead of last year's daily average of 2.02 billion.
Declining stocks outnumbered advancing ones by a ratio of about 3 to 1 on the NYSE and by 2 to 1 on Nasdaq.