Stocks fell on Thursday, hit by losses in financial companies after Bank of America Corp reported a sharp drop in earnings, stoking concern the credit crunch was dragging on profits and the economy.

The No. 2 U.S. bank said profit plummeted 32 percent as it took large write-downs for leveraged and other loans and recorded losses from structured products, including mortgage debt.

The drop in earnings exceeded analysts' expectations and followed a huge profit slide at No. 1 U.S. bank Citigroup Inc on Monday. Washington Mutual Inc, the largest U.S. savings and loan, also said profit fell sharply on Wednesday and blamed mounting mortgage losses.

The Philadelphia KBW Bank Index dropped 1.7 percent

The problem with the financials -- nobody knows what the extent of the damage of the credit crunch is going to be, said John Kosar, market technician and director of research at Asbury Research in Chicago.

The Dow Jones industrial average was down 26.10 points, or 0.19 percent, at 13,866.44. The Standard & Poor's 500 Index was down 3.84 points, or 0.25 percent, at 1,537.40. The Nasdaq Composite Index was down 10.63 points, or 0.38 percent, at 2,782.04.

Interest rate futures showed the perceived chance of an interest rate cut by the Federal Reserve at the end of the month to help the economy had grown to 70 percent.

All of the news has been bad, and people that are optimistic on stocks are going to say that means the Fed will lower interest rates, fix everything and stocks are going to recover, said Kosar.

A report suggesting weakness in the labor market added to expectations the Fed would cut rates to forestall a downturn.

Stock indexes pared some of their losses. Among shares which rose were aluminum company Alcoa Inc, which advanced 1.1 percent to $38.38 and plane maker Boeing Co, which gained 0.6 percent to $96.15.

Bank of America shares dropped 4 percent to $48.02. Shares of Citigroup slid 1.7 percent to $43.91 while Washington Mutual sank 6.7 percent to $30.56.

Shares of homebuilders also declined. Luxury homebuilder Toll Brothers slumped 3.5 percent to $20.64.

Shares of mortgage lender Countrywide Financial Corp fell 2 percent to $16.96 after the Wall Street Journal reported that the U.S. Securities and Exchange Commission had opened an informal probe into stock sales by Chief Executive Angelo Mozilo.

On the Nasdaq, shares of eBay Inc dropped 6.5 percent to $37.95. Deutsche Bank cuts its rating on the stock.