Financials Lead Sell-Off Amid Bank Worries

Stocks fell sharply Friday, with volatility expected to remain high due to the expiration of options, oil prices continuing their climb and bank worries slamming the financial sector.

The Dow Jones Industrial Average tumbled more than 100 points, pushing the blue-chip index well below the key 12000 mark.

All three major indexes -- the Dow, S&P 500 and Nasdaq -- were off more than 1 percent.

Adding to the volatility today is quadruple witching -- when contracts for stock index futures, stock index options, stock options and single stock futures expire in the same day -- which could bring some wild swings toward the end of the day.

Financials were the biggest decliner, falling 3 percent, amid a swirl of dismal news.

Rumors of a profit warning from Merrill Lynch sent a ripple through the market. Merrill has refused to comment on the speculation but sources tell CNBC the rumors aren't true. Still, the stock dropped about 5 percent.

Regional banks have had a brutal week, with several cutting dividends and announcing plans to raise more capital to stay afloat.

Large-cap regional bank stocks are now in "capitulation mode" and will likely trade below fair value in the near term, said Merrill Lynch analyst Edward Najarian. The analyst cut his earnings estimates by an average 22 percent and 19 percent for 2008 and 2009, respectively. He also expects more banks to cut dividends and raise capital in the second half, including Bank of America and Wachovia .

There's cause to be wary of regional banks because regulators don't view them as too big to fail, Bill Gross, chief investment officer at top bond fund Pimco, told CNBC.

(To watch the interview with Pimco's Bill Gross, click on the video at left.)

As for the big Wall Street firms, Lehman Brothers, Citigroup and Morgan Stanley were all off about 3-4 percent.

Moody's stripped the insurance arms of Ambac Financial Group and MBIA of their AAA ratings, because of their weakened ability to raise capital and write new business.

MBIA shares, which have already tumbled 68 percent from the start of the year, dropped 10 percent. Ambac shares fell 2 percent.

Light, sweet crude jumped more than $4to nearly $136 a barrel amid reports that Israel carried out a large military exercise that appear to be a dress rehearsal for a bombing on Iranian nuclear facilities.

In the airline sector, low-fare carriers such as JetBlue and Southwest Airlines are being squeezed by high fuel prices and are forced to find ways to remain profitable, the New York Times reported.

And the already fragile housing market took another hit from Federal Reserve officials' comments that the Fed is worried about inflation, as worries about rate hikes permeate the market.

Get Ready:

MONDAY: Chicago Fed report
TUESDAY: Case-Shiller home-price index; Richmond Fed report; consumer confidence; two-day Fed meeting begins
WEDNESDAY: Mortgage applications; durable goods, new-home sales; weekly crude inventories; Fed rate decision; Earnings from General Mills, Monsanto, Bed, Bath & Beyond, Nike, Oracle and RIM
THURSDAY: Jobless claims; GDP (final) with corporate profits; existing-home slaes; Kansas City and Chicago Fed reports; ConAgra, Lennar earnings
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings