The credit markets were still uneasy but not showing the frantic trading they saw last week. And the dollar skidded lower, contributing to oil's surge.
While investors last week were pleased that federal authorities were constructing a plan to relieve the nation's banks of their toxic assets, many weren't waiting for the details to emerge Monday before seeking safety; selling was heavy across the market, although the financial sector again took some of the biggest hits. Investors are not sure how successful the plan might be in unfreezing credit markets, which many businesses depend on to fund day-to-day operations.
"The reason why they're tumbling down so much is because nothing has happened," Ladenburg Thalman analyst Dick Bove told CBS News correspondent Anthony Mason. "We don't know exactly when the government's gonna step in. We don't know exactly what the government's gonna buy."
Bush administration officials and congressional leaders have been meeting on the rescue plan, the thrust of which congressional leaders have endorsed. Many market observers are hoping for details of the plan to emerge by midweek and delays could weigh further on investor sentiment.
"This government opening of the checkbook - it's a stopgap measure that will calm people and help us buy a little bit more time but ultimately what we need to see is more confidence," said Rob Lutts, chief investment officer at Cabot Money Management Inc. in Salem, Mass.
While investors try to gauge the effect of the government's lifeline they also were absorbing more rapid changes in the banking sector. Morgan Stanley said it is working to sell up to a 20 percent stake to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.
The announcement comes after the Federal Reserve late Sunday granted Morgan Stanley and Goldman Sachs, Wall Street's last two major investment banks, . The move will allow the companies to set up commercial banks that will be able to take deposits, significantly bolstering the resources of both. However, they also will be subject to more regulation.
That shift came a week after negotiations failed to save Lehman Brothers Holdings Inc. from bankruptcy. That and a quickly assembled government bailout for insurer American International Group Inc. helped lead to a seizing up of the credit markets that spurred federal officials to formulate a plan to rescue companies from their bad debt.
The Dow fell 372.75, or 3.27 percent, to 11,015.69. The retreat follows the Dow's best two-day point gain since March 2000 so some retrenchment, especially amid the anxiety on the Street, wasn't unexpected. But the decline erased a gain of nearly 370 points from Friday.
Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 47.99, or 3.82 percent, to 1,207.09, and the Nasdaq composite index fell 94.92, or 4.17 percent, to 2,178.98.
Bank stocks continued to slide on Monday, reports Mason. Washington Mutual, the country's largest savings and loan, dropped another 22 percent; it's fallen 90 percent over the past year because of its exposure to bad mortgage loans.
Oil's rise of $16.37 to a closing price $120.92 a barrel came as investors snapped up supplies to cover the October contract, which expired at the end of Monday's session. Although the contract's pending expiration helped inflate crude's advance - it was up $25.45 at one point - trading still showed the intensity of emotion in the market, and still-active contracts also rose sharply.
Gold, also in demand as a safe haven, jumped more than $40.30 to settle at $909 an ounce.
The yield on the Treasury's 3-month Treasury bill was at 0.88 percent Monday, down from 0.94 percent late Friday, indicating that investors were still willing to take low returns on a safe asset. However, the yield was well above yields around zero at the height of last week's frenetic buying; yields move in the opposite direction from price. Short-term Treasurys are seen as the safest place to put cash.
The Treasury's 2-year note's yield was at 2.16 percent, up from 2.13 percent Friday. The yield on the 10-year benchmark Treasury was unchanged at 3.85 percent up from 3.82 percent late Friday.
Investors could grow nervous about the trajectory of the government's bailout plan if it appears that enough progress isn't being made, observers said. Senate Banking Committee Chairman Chris Dodd, D-Conn., said Monday he wants the government to receive a stake in the companies helped by the rescue.
Senate Democrats are also calling for the plan to include aid for homeowners struggling with mortgage payments and caps on executive compensation.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to appear before Congress on Wednesday for a briefing on the economy.
"There is going to have to be some sort of a homeowner relief package. I think that's part of where the give-and-take process is going to unfold this week," said Michael Strauss, chief economist at Commonfund. "I think the moderates on both sides know something has to get done."
The market did get some good news from Microsoft Corp., which said it plans to repurchase as much as $40 billion of its shares. The software maker said it completed a previous $40 billion buyback plan. The company also raised its quarterly dividend to 13 cents from 11 cents. Microsoft rose 24 cents to $25.40.
Morgan Stanley said it signed a letter of intent to sell its stake to Mitsubishi UFJ Financial for an as yet undetermined price. Morgan Stanley fell 12 cents to $27.09.
Meanwhile, Goldman Sachs fell $9.02, or 7 percent, to $120.78 following announcement of its move to become a commercial bank.
Other financial stocks fell sharply amid the continued uncertainty about the sector. JPMorgan Chase & Co. fell $6.25, or 13 percent, to $40.80, while American Express Co. fell $3.11, or 7.7 percent, to $37.29. They were the biggest decliners among the 30 stocks that make up the Dow industrials.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.27 billion shares.
The Russell 2000 index of smaller companies fell 33.30, or 4.4 percent, to 720.44.
Overseas, Japan's Nikkei 225 index climbed 1.42 percent, and Hong Kong's Hang Seng Index rose 1.58 percent. Britain's FTSE fell 1.41 percent, Germany's DAX declined 1.32 percent and France's CAC 40 fell 2.34 percent.