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Stocks Fall Sharply Amid Fresh Financial Worries

Stocks declined Monday amid a fresh wave of concerns about the financial sector.

Fannie Mae and Freddie Mac started the day off lower after a weekend report that the U.S. Treasury is growing increasingly likely to recapitalize the home-financing giants.

The stocks tumbled further, dragging down the broader market, after the Treasury Department reiterated that it is not going to backstop Fannie and Freddie.

"I think the mood was generally positive but I think it’s starting to turn negative as people start to think the other shoe hasn’t dropped yet in the financial sector," said Matt Cheslock, a senior specialist at Cohen Specialists.

The last two weeks of August are typically slow, and earnings season is done, which helped give this negative news some traction, Cheslock said.

Crude oil retreated to around $113 a barrel as concerns about the threat of Tropical Storm Fay to supply from the Gulf of Mexico subsided.

Geopoliticial tension also eased as Pakistani President Pervez Musharraf announced his resignation, averting impeachment, and Russian troops prepared to withdraw from parts of Georgia after signing an internationally-brokered ceasefire agreement.

JPMorgan analysts said they see opportunities in taking short positions on energy and long positions in financials. Analysts led by Thomas Lee downgraded the U.S. energy sector to "neutral" from "overweight," and said the next two years will see a shift toward a long financials trade.

But there was more bad news for financials than good.

The financial crisis won't end until next year or even 2010, Morgan Stanley co-President Walid Chammah told Germany's Handelsblatt newspaper.

Billionaire investor Wilbur Ross said as many as 1,000 banks could failbefore it's all over and Cumberland Advisors' David Kotok went so far as to name names, telling CNBC that Merrill Lynch and Wachovia could be among them.

Financials were lower across the board, with Merrill Lynch , Lehman Brothers and Wachovia off 4 percent or more. AIG and Bank of America were among the biggest decliners on the Dow.

General Motors was the biggest drag on the Dow after a weekend report in the Wall Street Journal that the auto maker won't buy advertising for the 2009 Academy Awards. The auto maker is also readying a big promotional kick for its 100th anniversary. On Thursday, GM is expect to announce investment plans for an Ohio plant.

In the closely-watched auction-rate securities (ARS) saga, a group of brokerage firms are rallying against efforts by New York State Attorney General Andrew Cuomo to have brokerage firms repay investors who purchased auction rate securities, CNBC has learned.

Separately, Merrill Lynch continues to negotiate with Cuomo's office, which is seeking a fine of $100 million or more in its ARS case, in addition to repaying investors. Sources inside Merrill and Cuomo's office said progress is being made on a settlement.

Home-improvement chain Lowe's beat profit and sales expectations, helped by the tax-rebate checks. The company expects a slowdown in the second halfbut raised its full-year outlook due to the robust second-quarter results.

Profit at the world's biggest miner BHP Billitonsurged 30 percentin the first half of the year on the back of strong demand from China but the company warned of weaker global growth ahead.

That's been a pattern this earnings season: solid second-quarter results but a weak outlook. A weak second half would surely rattle the market, making the summer rally seem more like a head fake than a market bottom.

Broadcom shares jumped after a report in Barron's suggested the stock could gain as much as 40 percent as the chip maker grabs some of the "smartphone" market.

THIS WEEK:

MONDAY: Housing-market index
TUESDAY: Housing starts; producer prices; State Street investor-confidence index; Fed's Fisher speaks; Earnings from Home Depot, Target, Medtronic, Saks, HP and Analog Devices
WEDNESDAY: Weekly mortgage applications; crude inventories; Videogame conference in Leipzig, Germany; Earnings from BJ's Wholesale and Limited Brands
THURSDAY: Jobless claims; leading indicators; Philly Fed survey; GM announces investment plans for Ohio plant; Earnings from Gamestop, Heinz, Hormel, Aeropostale, Gap and Intuit
FRIDAY: Fed conference in Jackson Hole begins; Earnings from WPP, AnnTaylor

WATCHERS: Obama is expected to select a running mate this week ahead of the convention

Send comments to cindy.perman@nbcuni.com.