Stocks closed lower as credit worries about Citigroup and other big financial institutions sparked a broad selloff.
Shares at Citigroup and other large lenders continued to tumble on a widespread belief that the worst was yet to come regarding subprime writedowns for the mortgage industry.
Analysts attributed the downward push on the markets in the face of an otherwise growing economy to basic fear.
"What you have right now more than ever is that the market is controlled by psychology," said Charles Massimo, president and founder of New York-based CJM Fiscal Management. "Even the individual investor that tries to insulate themselves and turn down the noise, the noise is getting too loud."
Bill Gross, chief investment officer of Pacific Investment Management or Pimco, predicted on CNBC that subprime writedowns could reach $250 billion.
The credit woes spread through the financial sector, dragging down Merrill Lynch, Goldman Sachs , Lehman Brothers , Legg Mason and JP Morgan.
Atop the news for the day was the continuing turmoil at Citigroup, where officials told analysts in a morning conference call they were still unsure of how much damage subprime writedowns could cause, but said the number could reach $11 billion and could grow if markets worsened. The news came as Citi Chairman and CEO Charles Prince resigned over the weekend.
Citi Chief Financial Officer Gary Crittenden said "there's no way I think anyone can give you an assurance of how things are going to move," even as he assured that the company would not decrease its dividend, as some have speculated.
Also in banking news, CNBC has learned that Merrill Lynch's board of directors has alerted BlackRock chairman Larry Fink that he can take over as CEO if he so chooses. Fink, according to sources close to the matter, has said he will take the next two weeks to decide.
A political crisis in nuclear-armed Pakistan also weighed on markets early. President Pervez Musharraf has imposed emergency rule, heightening a sense of uncertainty in Pakistan, and he had to quell rumors on Monday that he had been put under house arrest.
Moving the Market
The biggest deal of the day was the breakup of Internet conglomerate IAC/InterActive , which will spin off four of its biggest divisions, including its HSN shopping network, and retain 30 of its fastest-growing businesses to better capitalize on the growth of Web services.
Also, Time Warner shares edged upward on news that CEO Richard Parsons was stepping down and Chief Operating Officer Jeffrey Bewkes was taking over.
Among companies reporting results before the bell Monday, insurer Cardinal Health said quarterly earnings rose, led by its clinical and medical products businesses. Earnings of 86 cents per share were in line with analyst estimates.
Food distribution company Sysco is expected to report earnings per share of 41 cents, higher than 37 cents a year ago, while also in the food sector, Burger King reported higher quarterly profit, helped by new menu items and marketing promotions featuring the Simpsons and Transformers.
The world's No. 2 hamburger chain behind McDonald's said net income was $49 million, or 35 cents per share, in its fiscal first quarter that ended Sept. 30, compared with $40 million, or 30 cents per share, a year ago. Earnings beat analyst estimates of 33 cents per share.
Marvel Entertainment will also report results and its earnings are expected to rise to 28 cents per share from 16 cents a share a year ago.
Other market movers were Google, which announced details of its foray into the cellphone business, along with Wind River , which is believed to be a major supplier for Google's new initiative.
Novacea shares plummeted on news that the biotechnology firm was halting its trials of cancer drug candidate Asentar.
Also in the tech sector, Research in Motionshares gained on the Nasdaq after the company announced the availability of BlackBerry software geared toward medium and small businesses.
Kraft Foods also gained after the Wall Street Journal reported that the company is nearing a deal to sell its Post cereals business to store-brand food maker Ralcorp Holdingsfor about $2.8 billion.
The Chicago Board of Exchange's Volatility Indexremains high, above the benchmark of 20 for a volatile market.
Oil fell sharply after the Citigroup problems heightened concern over the economic health of the world's biggest fuel consumer. U.S. crude fell more than $2 at one stage.
The news provided little relief to consumers, though, as gas at the pump climbed back over $3 nationally. Prices have risen 24 cents a gallon over the past month.