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Stocks Fall Over 3% Amid Bank Jitters

Stocks ended sharply lower Monday as Bank of America earnings and stress-test buzz dragged down financials.

The Dow Jones Industrial Average lost 289.60, or 3.6 percent, to close at 7,841.73. All 30 Dow components ended lower with Bank of America losing the most and IBM losing the the least.

The tech-heavy Nasdaq shed 3.9 percent and the S&P 500 tumbled 4.3 percent.

The negative start to the week followed a six-week winning streak, the longest weekly streak since 2007, which had given investors hope that the slump may be coming to an end. Today's session did little to fuel their hopes. And, with 40 percent of the Dow components and a quarter of the S&P 500 reporting this week, there's still room for gloom.

The CBOE volatility index, widely considered the best gauge of fear in the market, jumped 15 percent to close at 39.18.

Financials, which have rallied in the past few weeks after a couple of encouraging earnings reports, took a beating after a trifecta of disappointing news.

First was Bank of America earnings, which beat expectations, helped by Merrill Lynch, but also revealed a huge jump in troubled loans.

The news sent Bank of America stock to the bottom of the Dow pack, with shares falling nearly 25 percent to close at $8.02.

Investors were also troubled by a report that the government is converting its interest in bailed out financial institutions from preferred into common shares. The move is seen as a political maneuver that will enable the White House to avoid asking Congress for more money, but also constitutes a de facto nationalization of the businesses that will give the government ownership stakes.

And earlier buzz in the blogosphere indicated that bank stress-test results showed 16 of the 19 big banks tested were "technically insolvent." The Treasury later released a statement that the stress-test results weren't in yet but the damage to the stocks was already done.

The entire financial sector fell sharply, including Dow components Citigroup and JPMorgan , which lost 20 percent and 11 percent, respectively.

President Barack Obama is looking to curb deceptive practices in the credit-card industry, which have helped to saddle consumers with huge debts, a senior aide said Sunday.

American Express dropped 13 percent and Capitol One tumbled 25 percent.

Sun Microsystems soared 37 percent following news that Oracle hasagreed to buy the computer server and software maker for $9.50 a share, a nearly 30-percent premium from Friday's closing price. The deal is valued at $7.4 billion.

Oracle shares fell 1.3 percent.

IBM, which had been in talks to buy Sun but then rejected any possibility of a deal last week, reports earnings after the closing bell. Analysts expect earnings of $1.66 a share. Its share ended down 0.8 percent ahead of the announcement.

Boston Scientific and Texas Instruments are also due to report after the bell. The stocks lost 6.4 percent and 3.6 percent, respectively.

PepsiCo beat its earnings target and backed its full-year outlook. The soft-drink maker also said it was offering about $6 billion to buy up shares in its two largest bottlers, Pepsi Bottling Group and PepsiAmericas, in a bid to further integrate the units. Its shared ended down 4.4 percent.

>> A New Pepsi Generation?

Pharmaceutical giant Eli Lilly also topped forecasts, reporting earnings of $1.20 a share. Its shares fell 2.3 percent.

Outside of financials, General Motors was one of the biggest percentage decliners on the Dow, falling 11 percent, as the auto maker is gearing up to let go of its controlling stake inOpel/Vauxhall, the Financial Times reported.

GM would ask for no cash for the stakes, just a pledge to invest directly in a new company formed from its European operations, the report said.

Also, GM said 1,600 workers would be losing their jobs in the next few days as efforts continue to cut costs.

>> Automakers Need to Keep Their Racing Pedigree

Trading volume was moderate, with 1.76 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers, about 3 to 1.

This Week:

MONDAY: Earnings from IBM, Boston Scientific, Texas Instruments after the bell
TUESDAY: Citigroup shareholders meeting; Earnings from Caterpillar, Coca-Cola, Merck, Schering-Plough, Dupont, United Tech, Delta Airlines, Lockheed Martin, State Street, United Health, US Bancrop, Yahoo, Broadcom, Capital One
WEDNESDAY: Weekly mortgage applications; weekly crude inventories; Earnings from AT&T, Boeing, McDonald's, Morgan Stanley, Wells Fargo, Altria, Ingersoll-Rand, Kimberly-Clark, Apple, eBay, Qualcomm and Yum! Brands
THURSDAY: Weekly jobless claims; existing-home sales; Earnings from Conoco-Phillips, GlaxoSmithKline, Pepsi, UPS, Fifth Third, Marriott, PNC Financial, SunTrust, Union Pacific, US Air, Microsoft, Amazon, AmEx and Burlington Northern
FRIDAY: G-7 meeting in Washington; durable-goods orders; new-home sales; Earnings from 3M,Honeywell, Schlumberger and Xerox

Send comments to cindy.perman@nbcuni.com.