U.S. Stocks End Sharply Off On Trouble In Financial Sector

NEW YORK (MarketWatch) -- U.S. stocks on Monday extended their first decline in five sessions as Standard & Poor's cut its debt ratings on three large brokerages, adding to earlier losses stemming from upheavals at Wachovia Corp. and Washington Mutual Inc.

The ratings agency disclosed its downgrades involving Lehman Brothers Inc., Merrill Lynch & Co. Inc. and Morgan Stanley in a release, citing "the potential for more write-offs." .

"Concerns in the financial sector have been in the spotlight, following trouble at the U.K. lender Bradford & Bingley, while management shake-ups at Wachovia and Washington Mutual have unsettled the markets as well," said analysts at Action Economics.

The Dow Jones Industrial Average fell 134.5 points, or nearly 1.1%, to end at 12,503.82, with all but two of its 30 components sinking.

The financial sector led blue-chip declines, with American Express Co. down 2.4%, Bank of America Corp. off 1.3% and J.P. Morgan Chase down 2%.

General Motors Corp. led the limited gains among blue chips, with shares of the auto maker rising 2% in the wake of a favorable weekend article in Barron's that overshadowed expectations GM would announce a sharp decline in sales for May.

Economic data proved less worrisome than feared, but had little impact on the slide among the broad stock indexes, with the Institute of Supply Management's index of manufacturing activity rising to 49.6 in May from 48.6 in April. .

And, the government reported U.S. construction spending fell 0.4% in April following a revised 0.6% drop in March.

Financial factor

The S&P 500 declined 14.71 points, or 1.1%, to 1,385.67, with financials fronting declines among the index's 10 industry groups, off 1.7%, led by Lehman Brothers , down 8.1%.

Shares of Merrill Lynch also fell, off 3% and Morgan Stanley dropped 2.6%.

Shares of Wachovia Corp. fell 1.7% after the nation's fourth-largest bank dismissed CEO Ken Thompson, citing a series of "disappointments."

Washington Mutual Inc. , the nation's largest thrift, answered criticism of its corporate governance and financial hemorrhaging by splitting the office of chairman and CEO and by adopting a majority-voting standard for its directors. Its shares ended down 0.2%. .

Also weighing on financial stocks, British lender Bradford & Bingley PLC warned on profit and said it would raise less from selling discounted shares than it previously set out. The lender also announced the departure of its chief executive and said TPG Capital will become a major shareholder.

As first-quarter earnings season winds down, analysis by Thomson Reuters shows companies in the financial sector missed earnings estimates by 39% on average.

Energy proved the only gaining sector on the S&P, up 1.1%, with Tesoro Corp. leading those gains, up 10.9%. .

The Nasdaq Composite shed 46.87 points, or 1.9%, to 2,475.79.

Volume on the New York Stock Exchange neared 1.1 billion, with declining stocks outpacing those advancing more than 2 to 1. On the Nasdaq, 831 million shares traded, and decliners outdid advancing shares, 2 to 1.

Government bonds gained, pushing yields down for a second day, with the 10-year note yield falling 10 basis points to 3.97% to price at 99 8/32. .

The dollar came under renewed pressure, with the dollar index, which tracks the greenback against a basket of six major currencies, at 72.910, down from 73.107 earlier on. .

Crude-oil futures climbed for a second session, with the contract for July delivery closing 41 cents higher at $127.76 a barrel on the New York Mercantile Exchange , while gold futures also gained, with the contract for August delivery ending at $897 an ounce, up $5.50. .

Overseas, Japan's Nikkei 225 ended with a 0.7% rise , while Britain's FTSE 100 dropped 0.8%. .

By Kate Gibson