Stocks ended a yo-yo session lower Monday as big drug makers skidded following news of Merck's proposed $41.1 billion takeover of rival Schering-Plough.
But banks held gains as investors hoped for more clarity on the government plan to firm up the financial system, with Fed Chairman Ben Beranke meeting with President Obama today.
The Dow Jones Industrial Average lost 79.89, or 1.2 percent, to close at 6,547.05, after shedding more than 6 percent last week.
The S&P 500 dropped 1 percent to finish at 676.53, and the Nasdaq skidded 2 percent to close at 1,268.64, its lowest close in 4 1/2 years.
Weighing on the market were comments today from Warren Buffett that the current environment was an "economic Pearl Harbor" and from Nouriel Roubini, aka Dr. Doom, that the U.S. recession could last up to 36 months.
Bank of America was the top gainer on the Dow, jumping 19 percent, after a Barron's article said BAC can avoid the same fate as Citigroup by tightening up its operations, and could post strong earnings again once the financial crisis has passed.
Wells Fargo and USB each gained more than 15 percent.
General Motors was the No. 2 gainer on the Dow, soaring 16 percent, after the auto maker said its German unit Opelis not preparing for bankruptcy.
General Electric gained 5 percent following news that GE Capital plans to sell more bonds under a government guarantee program. GE is the parent company of CNBC.
Capital One became the latest financial to announce a dividend cut, saying it was slashing its yield from 37.5 cents to 5 cents beginning in the second quarter and holding into the future. The credit card company said the move will save $500 million annually. Its shares rose.
At least two dozen American and European banks, including Goldman Sachs and Deutsche Bank , benefited from the bailout of American International Group, with approximately $50 billion paid out to them since the Federal Reserve first gave aid to the insurance giant, the Wall Street Journal reported.
Goldman's CEO said he opposed full nationalization with the banks, in an interview with a German publication, while two key congressional Republicans said some troubled banks should be allowed to fail.
Senator Richard Shelby, top Republican on the Senate Banking Committee, said the United States should not mimic Japan, which in the 1990s propped up failing banks and prolonged its economic downturn. And Senator John McCain, also criticized the new administration's response to the banks.
On the other end of the spectrum, Merck was the biggest drag on the Dow, falling 7.7 percent, following news of Merck's proposed $41 billion takeover of rival Schering-Plough. Schering shares jumped 20 percent.
Meanwhile, Swiss drug maker Roche is said to be near a deal to buy U.S. biotech firm Genentech for $95 a share. Genentech gained 2 percent, finishing shy of $93.
And Dow Chemical and Rohm & Haas have reached a merger agreement that will give Rohm shareholders $78 a share.
Technology stocks gave up earlier gains spurred by Barron's adding three techs to its list of top picks for the next 10 years. Microsoft made the list for its long-term growth potential, Google was added because it doesn't have debt and eBay made it because of its cash holdings and low cash requirements.
Amazon finished down 2 percent even after Piper Jaffray raised its rating on the online store's stock to "buy" from "neutral," citing a survey showing a high level of consumer satisfaction with the company.
Google lost nearly 6 percent, piling on to its four-week slide.
Shares of Halliburton rose 4 percent after FBR said gasoline consumption would continue to decline and investors should turn their sights towards larger firms in the industry. FBR upgraded both Hallirburton and Transocean to "outperform."
The newspaper industry continued its difficult year as national chain McClatchy , which owns the Sacramento Bee, Miami Herald and other papers, said it will cut 1,600 positions, or about 15 percent of its workforce.
TUESDAY: Fed's Bernanke speaks; wholesale trade; Earnings from J. Crew, Kroger, Hovnanian; Senate hearing on investor protection, market regulation
WEDNESDAY: Weekly mortgage applications; weekly crude inventories; Fed budget; Earnings from American Eagle, Nat Semi, Neiman Marcus, Staples; House panel meets on mortgage-lending reform
THURSDAY: Retail sales; weekly jobless claims; business inventories; Earnings from Smithfield foods
FRIDAY: International trade; import/export prices; consumer sentiment; Geithner to attend G20 meeting in UK.
—Reuters contributed to this report.