Wall Street slumped to a 12-year low on Monday as investors lost faith that the U.S. government will be able to stabilize the financial system.

The S&P 500 and the Dow both posted their lowest closes since the spring of 1997 as reports the government may convert its stake in Citigroup into a big common stock holding fell short of what many see as necessary to fix big banks.

It is generally a market 'no' vote to what we're getting from Washington, said Hank Smith, chief investment officer at Haverford Trust Co in Philadelphia, of the reaction to the Citigroup news.

It certainly doesn't inspire confidence when you do break multi-year lows, so it's just feeding into a real negative cycle that we're in right now, he said.

Adding to the bleak picture, CNBC reported that insurer American International Group could be forced into bankruptcy if new rescue talks with the government fail to secure it more funding.

The Dow Jones industrial average tumbled 250.73 points, or 3.40 percent, to 7,114.94. The Standard & Poor's 500 Index dropped 26.71 points, or 3.47 percent, to 743.34. The Nasdaq Composite Index skidded 53.51 points, or 3.71 percent, to 1,387.72.

In addition, worries about a decline in business and consumer spending on technology hurt the biggest names in the tech sector. IBM and Hewlett-Packard were the two of the biggest drags on the Dow industrials, with IBM shedding 5.0 to $84.37 and Hewlett-Packard sliding 6.3 percent to $29.28

About $10 trillion of value in U.S. stocks has been wiped out since the market's record high close in October 2007.

So far this year, the Dow has fallen 18.9 percent while the S&P 500 has shed 17.7 percent and the Nasdaq has dropped 12 percent.

Fears that some major U.S. banks could be nationalized continued to drag on sentiment on Monday, as stocks briefly came off lows after the White House reiterated that a privately held banking system regulated by the government was still the best way to operate.

As the only boosts to the Dow, Citigroup and Bank of America were up 9.7 percent and 3.2 percent, respectively, after having fallen more than 35 percent each on Friday.

Helping to fuel the tech slide was a Morgan Stanley downgrade of its PC sales forecasts for 2009 and 2010, citing lower prices and weaker-than-expected demand for PCs given the rising sales of netbooks, which are cheaper, no-frills notebook computers.

Apple Inc, down more nearly 5 percent to $86.95, was the primary drag on Nasdaq.

Dow component General Electric, whose businesses include a big financing arm, also weighed on the blue-chip index after Deutsche Bank cut its price target on GE by almost a third and said the company's dividend may be vulnerable in the second half of 2009. [ID:nWNAB5446]. GE fell 5.7 percent to $8.85, after hitting a 13-year low of $8.78.

A decline of more than 13 percent in shares of U.S. Steel Corp contributed to a 6.2 percent slide in the S&P materials index.

Trading was active on the New York Stock Exchange, with about 1.59 billion shares changing hands, above last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.02 billion shares traded, below last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by 6 to 1 while decliners beat advancers on the Nasdaq by about 4 to 1.

(Additional reporting by Leah Schnurr; Editing by Leslie Adler)