Stocks tumbled to session lows after Standard & Poor's slashed its rating on the financial sector.
The Dow Jones Industrial Average was down more than 150 points, or 1.4 percent, snapping a four-day winning streak. The S&P and Nasdaq were also off more than 1 percent. The CBOE Volatility Index, a gauge of fear in the market, shot up 14 percent, the biggest jump since March.
S&P slashed its rating on several big U.S. banks, including Lehman Brothers , Merrill Lynch and Morgan Stanley .
"The outlooks on the large financial institutions sector in the U.S. are now predominantly negative," the credit rating agency said in a statement, noting the potential for more write-offs from the sector.
There were also a few shake-ups on the executive floor.
Wachovia announced that it hasousted CEO Ken Thompson, who has come under fire as the fourth-largest U.S. bank suffered through a series of credit-related problems. Wachovia said Chairman Lanty Smith will serve as interim CEO until a successor is found.
Washington Mutual , which has taken a hit from the mortgage slump, announced that it would strip CEO Kerry Killinger of his chairman title. WaMu shares have plunged 79 percent in the past year.
Financials were the biggest decliners of 10 key S&P sector indexes, sliding 2.6 percent.
Adding to the concerns, new signs emerged that financial troubles are spreading around the globe.
U.S. private equity group Texas Pacificagreed to buy a 23 percent stakein Bradford & Bingley, providing a much-needed boost for the troubled UK lender as conditions in the UK mortgage market deteriorate.
In still more financial news, General Electric, CNBC's parent company, said GE Commercial Finance will acquire Banco Santander's Italian commercial bank Interbanca. In turn, the Spanish bank agreed to buy GE Money's businesses in Germany, Finland and Austria, and its card and auto businesses in the U.K. Both deals are valued at about 1 billion euros ($1.55 billion).
Economic data didn't help stocks either, instead fanning concerns about inflation.
The Institute for Supply Management reported its manufacturing-activity index unexpectedly rose in May to 49.6, just shy of the 50 mark, which indicates expansion. That was up from 48.6 in April. However, an inflation gauge in the report surged to its highest level since April 2004.
"Manufacturers find themselves caught between rising costs and weakening demand in many industries," the ISM said. "Exports continue strong due to the weak dollar -- without the weak dollar the story would be much more negative in manufacturing."
Meanwhile, construction spending slipped 0.4 percent in April, but came in better than expected. Conditions continued to deteriorate in the residential sector but private spending outside of home building -- on everything from lodging to offices and factories -- improved for a third straight month.
Investors will be keeping an eye on major auto makers, which are expected to post steep declineswhen they report May sales on Tuesday.
Last week, Ford warned that it no longer expects to post a profit in 2009 amid sluggish sales of its pickups and SUVs. Toyota is also mulling lowering its U.S. sales outlook.
Shares of General Motors , however, rose after a weekend report in Barron's that said GM shares could triple over the next few years. GM was the lone gainer on the Dow.
In the pharmaceutical industry, a study found that adding cancer drug Erbitux, manufactured by ImClone Systems , to standard chemotherapy helped advanced lung cancer patients live just a month longer than chemo alone.
Shares of Harris Corp. tumbled after the defense-communications and information-technology company said it is not for sale and is not pursuing a merger. The announcement, which broke weeks of speculation, was uncharacteristic as the company doesn't usually respond to rumors. But CEO Howard Lance said the company felt obligated to issue a statement as the rumors could be damaging to the company and fuel speculation in its stock. Shares had risen more than 6 percent on Friday after a report in the Wall Street Journal suggested that preliminary bids were in the low $70s per share.
MONDAY: ISM manufacturing index; construction spending; Fed's Lockhart speaks
TUESDAY: Auto sales; factory orders; Bernanke speaks; Earnings from Toll Brothers, Hovnanian; Montana, New Mexico primaries
WEDNESDAY: MBA mortgage applications; productivity; ISM services index; crude inventories; Bernanke, Lockhart speaks
THURSDAY: Jobless claims; Fed's Plosser speaks; Earnings from Nat Semi
FRIDAY: Jobs report; wholesale trade; consumer credit; Fed's Evans, Bullard speak
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