U.S. Stocks Slammed As Financials Undercut Sentiment

NEW YORK (MarketWatch) -- U.S. stock indexes dropped about 2% Monday, retreating after three straight sessions of mostly gains, as concerns about the financial sector continued to weigh on sentiment and housing data failed to appease investor unease.

"Financial stresses are still permeating global financial systems, despite massive accommodation from the Fed," said analysts at Action Economics.

Down for the first in four sessions, the Dow Jones Industrial Average was recently down 216.90 points, or 1.9%, to 11,411.16.

All of the Dow's 30 components posted declines, led by insurance giant American International Group Inc. , down 4.4% after Credit Suisse analysts lowered their third-quarter profit estimate and target price on the insurance giant.

The S&P 500 was off 22.47 points, or 1.7%, to 1,269.73, with all of the index's 10 industry groups tallying losses, which in the late afternoon were fronted by materials, down 2.3%.

Among the hardest hit, shares of Allegheny Technologies Inc. were down 4.6%.

Consumer discretionary, industrials and financials also followed suit, with each sector sliding almost 2%.

Capital demands

Shares of Freddie Mac jumped 19.6% as solid demand for a $2 billion debt auction showed the troubled mortgage company is still able to raise capital, even if the markets demand higher yields. .

Shares of Freddie counterpart Fannie Mae were up 8.4%.

Outside the financial sector, shares of Cablevision Systems Corp. were off 5% after Citigroup Inc. cut its rating on the Bethpage, N.Y.-based cable operator to sell from buy. .

The Nasdaq Composite declined 47.21 points, or 2%, to 2,367.50.

Trading volume was light, topping 486 million on the New York Stock Exchange, where declining issues overtook those advancing almost 4 to 1. On the Nasdaq, nearly 368 million shares exchanged hands, and advancers topped decliners roughly 4 to 1.

Down from the session's start, stock indexes retained their losses after the National Association of Realtors reported existing-home sales rose in July, but inventories also increased, hitting record levels.

"An increase in foreclosures boosted existing home sales but depressed home prices. The rise in inventory is particularly worrisome," wrote Lehman Brothers analysts Michelle Meyers and Zach Pandl in an afternoon note.

Treasury prices advanced, pushing 10-year yields to three-month lows, in the wake of the data suggesting the nation remains mired in a housing slowdown.

On the New York Mercantile Exchange, crude-oil futures fell 34 cents to $114.25 a barrel. .

Elsewhere on the NYME, gold futures also fell, with the contract for December delivery declining $7.80 to close at $825.70 an ounce. .

Weakening crude-oil prices helped the dollar erase earlier losses against most major counterparts, with the dollar index , which tracks the greenback against a trade-weighted basket of currencies, recently standing at 76.846, up from 76.813 in late North American trading on Friday. .

In corporate developments, Canadian energy-services provider Precision Drilling Trust plans to buy Grey Wolf Inc. for an estimated $1.12 billion in cash and 42 million shares of its stock. .

But investors offered a less-than-enthusiastic response, with shares off both companies sliding.

Overseas, stocks in Europe drifted lower in thin trade, paced by a decline in banking shares. .

Elsewhere, Hong Kong and Tokyo stocks staged a strong recovery as investors snapped up financial shares. .

On Friday, stocks rallied, with the Dow striking its largest one-day gain in two weeks, after oil fell more than $6 a barrel, its greatest percentage decline in more than four years.

By Kate Gibson