"What were once just concerns about credit have graduated to a full-blown panic," said Kevin Giddis, managing director, fixed income, Morgan Keegan & Co.
The Dow Jones Industrial Average recently fell 43 points 13,549.74, with 20 of its 30 components lower.
Citigroup led the Dow's declines, its stock slumping 4.5%, after it stirred investor discontent with its announcement that Charles Prince would step down as chairman and chief executive of the largest U.S. bank, which is also looking at writing off up to $11 billion more of the $55 billion in subprime-related securities it holds. .
The S&P 500 fell 7.73 points to 1,501.92, while the Nasdaq Composite shed 14.34 points to 2,796.04.
Stocks pared their losses a bit after the Institute for Supply Management reported nonmanufacturing sectors of the U.S. economy in October grew more than economists expected, with the ISM index rising to 55.8% from 54.8% in September.
Volume on the New York Stock Exchange came to 301 million, and declining stocks outran advancing issues almost 5 to 1. On the Nasdaq, 422 million shares exchanged hands, and decliners topped advancers nearly 3 to 1.
In the wake of Citigroup's disclosures and top-management shakeup, the shares of rivals Merrill Lynch & Co. , Bear Stearns Cos. , Credit Suisse Group and Barclays were all the subject of brokerage downgrades.
Other developments on the corporate front included Dell Inc.'s disclosure that the computer manufacturer had inked an agreement to acquire storage supplier EqualLogic for about $1.4 billion in cash.
Ford Motor Co. and the United Auto Workers reached a tentative contract agreement, including a memorandum of understanding to set up an independent health-care trust for retired workers.
And shares of PetroChina Co. more than doubled in their Shanghai debut, giving the oil giant a $1 trillion market capitalization and easily passing Exxon Mobil Corp. as the world's largest company.
In commodities trading on the New York Mercantile Exchange, crude-oil futures fell $1.72 to stand $94.21 a barrel, while gold futures shed $2.00 cents to $806.50 an ounce. .
Treasurys rallied, with the benchmark 10-year note rising 6/32 to 103 17/32, its yield falling to 4.305%.
European shares traded in the red with credit-market jitters back in the news as a private-equity fund withdrew its offer to buy the U.K. supermarket chain J Sainsbury.
And overnight, Hong Kong stocks skidded after comments by China's premier raised concerns that a plan to let Chinese investors buy Hong Kong stocks could face delays. .
By Kate Gibson