Stocks fell on Tuesday as a surprising drop in retail sales dented hopes the recession was abating and financial shares slid on fears that Goldman Sachs' share offering could prompt others to follow suit.

Retail sales in March snapped two months of increases and sparked selling across the board, with the stocks of retailers, big manufacturers and energy companies among the casualties. The S&P retail index <.RLX> fell 2.5 percent.

But the financial sector, which had recently led the stock market's 5-week rebound from 12-year lows, took the biggest beating by far, with the KBW Bank index <.BKX> falling 8.1 percent and the S&P financial index <.GSPF> dropping 7.7 percent.

There is fear that other banks wanting to pay back government funds may want to raise cash by issuing shares, said Ryan Detrick, senior technical strategist at Ohio-based Schaeffer's Investment Research.

The gloomy news on retail shows that maybe the economy hasn't turned around as the last 5-week bounce suggested.

The Dow Jones industrial average <.DJI> dropped 137.63 points, or 1.71 percent, to 7,920.18. The Standard & Poor's 500 Index <.SPX> fell 17.23 points, or 2.01 percent, to 841.50. The Nasdaq Composite Index <.IXIC> declined 27.59 points, or 1.67 percent, to 1,625.72.

Among consumer-oriented plays, department store operator Macy's tumbled 7.3 percent to $11.99, while shares of Wal-Mart Stores , the world's biggest retailer, fell nearly 1 percent to $51.12, and consumer goods maker Procter & Gamble
declined 1.6 percent to $47.25.

Shares of fast-food company McDonald's Corp declined 2.3 percent to $54.82, making the stock one of the top drags on the Dow industrials.

Consumer spending accounts for about two-thirds of U.S. economic activity and is a pillar of corporate profits.

In recent weeks, investor sentiment had been buoyed by some reassuring economic reports, including some on housing, that suggested the economic slump was abating.

In a major speech, U.S. President Barack Obama said there were signs of recovery, but by no means are we out of the woods just yet. For more details see [ID:nN14428395]

The sell-off halted a three-day run-up in the S&P 500, but the benchmark index is still up 24 percent since hitting a 12-year closing low on March 9.

Goldman Sachs shares slid 11.6 percent to $115.11, a day after the company said it would raise $5 billion by issuing common stock and posted a stronger-than-expected quarterly profit. Equity offerings are traditionally a drag due to their dilutive effect.

Additionally, analysts said there were concerns about the quality of Goldman's earnings.

Shares of JPMorgan , due to post quarterly results on Thursday, fell 9 percent to $30.70 and contributed the most to the Dow's decline.

Bank of America shares fell 8.4 percent to $10.09, while shares of Wells Fargo , which last week posted surprisingly upbeat preliminary first-quarter results, slid 7.2 percent to $18.27.

Among energy shares, Chevron shed 2.1 percent to $66.58, and shares of ConocoPhillips lost 1.2 percent to $39.57.

On Nasdaq, shares of Apple Inc , the iPhone maker, were a top drag, down 1.6 percent at $118.31, followed by Web search leader Google , off 2.4 percent at $368.91.

Among bright spots, shares of Johnson & Johnson finished up 0.4 percent at $51.37 after the diversified health-care company reported a better-than-expected profit.

And in contrast to other bank stocks, Citigroup ended up 5.5 percent at $4.01.

(Reporting by Ellis Mnyandu; Editing by Jan Paschal)