Stocks closed broadly lower after financial giant Citigroup halted its stock buyback plan and said it and two other big U.S. banks will create a multibillion-dollar fund in order to support the struggling commercial debt market.
"I don't think we're going to see a big pullback in the market," said Michael Ryan, head of UBS Wealth Management. "I think when you see such a big rebound, it's not surprising to see either a spike in oil prices or concerns about earnings have an impact short term."
The Dow Jones Industrial Average fell to a triple-digit loss, down about 0.8%, but ended off session lows. The broader S&P 500 and the Nasdaq Composite each saw similar declines.
Investors also grappled with record high oil prices as U.S. crude oil futures soared 3 percent to hit a new record of $86.13 a barrel on the New York Mercantile Exchange, driven by geopolitical concerns, winter fuel supply concerns and a weak dollar. Crude oil is up 41% year to date.
Shares of Citigroup fell after the country's largest financial services firm announced a 57 percent decline in third-quarter earnings. The company also said consumer credit will likely weaken this quarter as mortgage delinquencies have increased.
"I think we're looking for good corporate (profit) margins outside of financials," said Lincoln Anderson, chief investment officer at LPL Financial Services. "It's a one time factor, it looks like the writeoffs are happening all at once and if you take away financials and for the rest of the economy, we have room for a margin increase."
Citigroup, JP Morgan Chase and Bank of America said said they reached an agreement to pool money to prevent investment funds from having to dump assets into the market.
"It is the biggest story of the week," said Sal Catrini of Bear Stearns. "All the banks report this week so maybe we'll see a little bit how much they talk about it and how much they think it is going to impact their business."
Sources familiar with the matter said the fund will be roughly $80 billion and will buy ailing mortgage securities and other assets, in part to prevent the credit crunch from further
hurting the global economy.
News of the rescue fund failed to allay all of investors' concerns about the credit squeeze that roiled markets this summer.
JP Morgan and Bank of America shares traded lower, while shares of credit card issuer American Express also fell.
Analysts said the news could fuel further caution about the financial sector and fallout from the subprime mortgage losses.
"The news about the fund is sending the signal to the market that the banking companies are still concerned about the credit issues," said Subodh Kumar, chief investment strategist
at Kumar & Associates.
"It's more controversial than people thought in that not everybody agrees with it. It could be another way of avoiding a market solution. That's why people want to see the (earnings)
news from individual banks this week."
In deal news, industrial conglomerate Danaher said it had agreed to buy electronic testing company Tektronix for $2.8 billion to expand its product line. Shares of Tektronix were up more than 30 percent.
Shares of Medtronic plunged after the medical device maker said it suspended sales of a component to defibrillators, saying the equipment may have contributed to five patient deaths.
Biogen Idec, which said on Friday it has put itself up for sale, may get bids of around $25 billion to $30 billion from several of the world's top drugmakers keen to expand into biotechnology, according to analysts. Shares rose more than 18% on Monday.
High oil prices weighed on large industrial companies but boosted the energy sector. Caterpillar shares fell on the NYSE, but Exxon Mobil shares gained more than 1 percent.
U.S. Treasury debt prices rose on Monday as stock losses inspired by a weaker financial sector and fresh worries about credit shortages rekindled a bid for safe-haven government bonds.
In other earnings news, toy maker Mattel narrowly missed analysts' expectations for its third-quarter operating profit, with net earnings hurt by recalls.
In Europe, stocks were pressured as investors prepared for a week packed with important global earnings reports.
Asian markets traded to record gains to start the week, with China's Shanghai Composite Index rising 2.2%.