U.S. stocks stumbled on Tuesday after Morgan Stanley downgraded the semiconductor sector and a shake-up at two big British banks prompted investors to sell financial shares.

Losses were limited as Warren Buffett's Berkshire Hathaway agreed to buy Burlington Northern in a deal that values the railroad company at $34 billion. Burlington shares surged 28.3 percent to $97.59, boosting the industrial sector <.GSPI> nearly 1 percent.

Technology stocks led the way down after Morgan Stanley downgraded the sector to cautious from attractive, and cut its view on Intel Corp , saying inventories were beginning to creep up in the sector. The PHLX semiconductor index <.SOXX> lost 2.2 percent.

Chips are very cyclical and tied to economic growth, so if you don't see them being absorbed quickly by the market, people think this recovery is just a little bit softer than expected, said Burt White, managing director and chief investment officer at LPL Financial in Boston.

But White said concern over chip inventories was overblown and said increased business spending will help absorb the inventories.

Financials and technology issues had been driving much of the market's recent recovery, and the day's negative developments hurt sentiment. Intel fell 3.1 percent to $18.42.

The Dow Jones industrial average <.DJI> fell 70.66 points, or 0.72 percent, to 9,718.78. The Standard & Poor's 500 Index <.SPX> lost 6.56 points, or 0.63 percent, to 1,036.32. The Nasdaq Composite Index <.IXIC> dropped 14.37 points, or 0.70 percent, to 2,034.83.

Overseas developments hampered the financial sector after Britain's Royal Bank of Scotland Plc and Lloyds Banking Group Plc agreed to sell hundreds of branches and key businesses to appease European Union concerns over state aid and competition.

In addition, Swiss bank UBS AG posted its fourth consecutive quarterly loss. The KBW banks index <.BKX> fell 1.8 percent.

The day's bright spot came from Berkshire Hathaway Inc's offer to buy Burlington Northern Santa Fe Corp for $100 a share, Berkshire's biggest deal ever.

Among its peers, Union Pacific Corp gained 6.8 percent to $58.78, and CSX Corp was up 6.2 percent at $45.48. The iShares Dow Jones Transportation Average ETF climbed 4.8 percent to $67.36.

Data showed new orders received by U.S. factories rose more than expected in September but had little impact on the broader market.

The Federal Open Market Committee's two-day meeting on interest rate policy is expected to begin around 2 p.m. (1900 GMT). The Fed is expected to leave rates close to zero.

(Editing by Kenneth Barry)