Stocks tumbled more than 2 percent on Monday on investor concerns Greece would fail to avoid a default on its debt and the effect that may have on European lenders and the global economy.
Banks slumped after a 10 percent fall in shares of Franco-Belgian financial group Dexia. The company is highly exposed to Greek loans and it highlighted concerns about the extent to which a default in Athens would damage already fragile European banks.
Greece admitted it will miss its deficit targets this year, which could make the country unable to receive more international aid and run out of cash.
U.S. banks including Morgan Stanley and Bank of America have all seen their credit default swap costs jump as other banks hedge their counterparty exposures and speculative traders bet on the situation worsening.
Morgan Stanley has been the most volatile name in recent weeks, with the cost of insuring its debt rising to levels not seen since November 2008, according to Markit data.
Morgan Stanley shares fell 6.7 percent to $12.59 and the S&P financial sector was down 3.3 percent, both hitting 52-week lows.
Everyone is looking at the Morgan Stanleys of the world, looking at their CDS gapping up here, said David Lutz, managing director of trading, Stifel Nicolaus Capital Markets in Baltimore.
The Dow Jones industrial average was down 212.25 points, or 1.94 percent, at 10,701.13. The Standard & Poor's 500 Index was down 24.94 points, or 2.20 percent, at 1,106.48. The Nasdaq Composite Index was down 61.79 points, or 2.56 percent, at 2,353.61.
The revelations that Athens would miss its deficit targets for both this year and next despite harsh new austerity measures will be the focus of talks as euro zone finance ministers met to discuss the next steps toward resolving the currency area's sovereign debt crisis.
A stronger-than-expected reading in a gauge of U.S. manufacturing briefly lifted Wall Street stocks, but global manufacturing shrank for the first time in over two years in September, reinforcing fears of another recession.
(Reporting by Rodrigo Campos; Additional reporting by Karen Brettell and Edward Krudy; Editing by Kenneth Barry)