Stocks closed sharply lower after a brokerage downgrade of Citigroup sparked concerns that
there may be more mortgage losses to come, raising doubts about the outlook for the economy.
Setting the tone for the session, Goldman Sachsrecommended that investors sell shares of Citigroup, saying the largest US bank may have to write off $15 billion over the next two quarters as mortgage losses reduce earnings.
Swiss Re, the world's biggest reinsurer, also fed concerns that there may be more losses from the global credit crisis with its announcement of a $1.07 billion write-down.
The Dow Jones Industrial Average and S&P 500 closed at their lowest levels in three months.
"It's dreadful. There's been aftershock after aftershock from the credit crisis," said Brian Gendreau, investment strategist at ING Investment Management. "And today, a major bank downgrading another major financial institution to 'sell' --that's unusual."
Investors also had to contend with more disappointing news on the housing front. The Dow Jones U.S. Home Construction Index marked its steepest drop in two months after an industry group said U.S. home builder sentiment stayed at a record low in November.
The National Association of Home Builders said potential buyers canceling orders or facing higher hurdles getting mortgages from lenders kept builders inundated with unsold
In addition, Lowe's, the No. 2 U.S. home improvement chain, slashed its full-year profit outlook, while a Credit Suisse said Freddie Mac , the No. 2 U.S. home funding source, may suffer between $1 billion and $5 billion of losses on risky subprime mortgages.
In the bond market, Treasury prices rose and yields dropped to two-year lows as investors bought Treasuries in a safe-haven move away from stocks.
Oil rose to nearly $95 on the weakening U.S dollar and concerns over whether OPEC will ramp up production next month to ease supply worries.
The dollar declined against the yen but held steady versus the euro Monday as a global rout in stock markets and high oil prices raised concern about the health of the U.S. economy and left investors wary of risky trades.
Results of Dow component Hewlett-Packard are due after the bell and its profit is expected to jump to 82 cents per share from 68 a year ago, due to its cost-cutting program. Investors are watching HP results for clues on the overall health of tech stocks.
On the Nasdaq, shares of Apple were among those leading decliners. Technology stocks have been hit by concerns that the credit crisis may hurt technology spending.
Clothing chain Tween Brands saw its shares fall precipitously after it reported earnings had fallen and cut its fourth quarter forecast.
Shares in EchoStar rose by as much as 27 percent after financial news Web site thestreet.com reported that AT&T is this week preparing a bid to buy the satellite television operator.
Thestreet.com said AT&T is preparing the final terms of a deal which values EchoStar stock between $64 to $68 a share, or about $29.5 billion in the middle of that range.
Shares of hat retailer Genesco lost as much as a quarter of their value as investors reacted to a lawsuit by Swiss bank UBS AG seeking court permission to pull out of an agreement to finance Finish Line's acquisition of Genesco.
Xerox, meanwhile, announced its first quarterly cash dividendin six years Monday, a sign that the business is again healthy. A dividend of 4.25 cents per share will be payable Jan. 31 for shareholders of record on Dec. 31.