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Stocks Finish in Bear-Market Territory

Stocks ended a tumultuous session with a late selloff that left all three major indexes in bear-market territory.

Financials fell sharply amid worries about more shoes to drop and techs took a hit after Cisco's chief raised concerns about business spending.

The Dow Jones Industrial Average fell 2.1 percent to close at 11147.44 and the S&P 500 lost 2.3 percent to 1244.69; for both, it was their lowest close in nearly two years. The Nasdaq tumbled 2.6 percent to 2234.89.

Trading was turbulent, with stocks up one minute, down the next, then tumbling with abandon toward the finish line. That's been the market's pattern this week and something analysts say will continue as the market frantically grasps for a bottom.

"At this stage it's becoming a bit of fear mongering," said David Bianco, a strategist at UBS Investment Research. "It's self-feeding momentum," he said.

The culprit was the financials and worries about earnings, which will get into full swing next week.

"I find it remarkable how much of the S&P's earnings are being masked by financials," Bianco said. "The market is 25 to 30 percent undervalued right now," he said, adding that earnings look pretty solid outside of the financial sector.

Bianco says it's going to take a pullback in oil prices and "just getting through the second-quarter reporting -- for people to see there isn't a profit contagion" for the market to settle down.

Oil prices finished a penny higher at $136.05 a barrel after a volatile session that saw oil up as much as $2 a barrel. Oil shed more than $9 a barrel in the prior two sessions.

Alcoa shed 2.4 percent despite the fact that its earnings and revenue beat forecasts. The aluminum maker earned 66 cents a share on sales of $7.62 billion in the second quarter, down from a profit of 81 cents a share on revenue of $8.066 billion last year. But analysts had expected 64 cents a share and $7.358 billion in sales, according to a consensus estimate from Thomson Reuters.

The report was an encouraging start to what is expected to be a challenging second-quarter earnings season but concerns lingered.

"I don't think that one earnings report such as Alcoa is going to turn things around," Ben Lichtenstein from Tradersaudio.com said on CNBC's "Worldwide Exchange."

"I think the market needs to flush out a little bit to the downside right now," he added, saying that better growth and jobs figures would help the market shake off its gloomy mood.

General Electric shares declined 3.1 percent ahead of its earnings, due out on Friday morning.

Earnings for the S&P 500 are now expected to have dropped 12.4 percent for the second quarter, a far cry from January's forecast of 4.7-percent growth, according to Thomson Reuters.

After leading the prior session, financials were the day's biggest decliner, accounting for the top three Dow decliners: Bank of America , American Express and Citigroup .

Investors in Fannie Mae and Freddie Mac are at risk for whiplash: The stocks plunged 13 and 24 percent, respectively, amid more chatter about the mortgage lenders' need to raise more capital. The stocks swung sharply higher on Tuesday after a significant drop on Monday.

Bond insurers Ambac and MBIA dropped 4.7 and 13 percent, respectively, snapping a two-day winning streak.

Fitch Ratings backed its ratings on four big investment banks: Lehman Brothers and Merrill Lynch, Morgan Stanley and Goldman Sachs but said Merrill is at imminent risk of downgrade due to additional writedowns and the amount of debt set to mature in the next year.

Merrill is said to be mulling a sale of its stakesin BlackRock or Bloomberg ahead of its earnings report, due out next week. Its shares plunged 9.3 percent.

Lehman dropped 11 percent, while Morgan Stanley shed 6.2 percent and Goldman lost 3.4 percent.

(What does the future hold for financials? Click on the video at left.)

Tech stocks, which were also among Tuesday's stars, fell sharply after Cisco chief John Chambers said many of the networking-gear maker's customers now see the economy picking up next year -- not this year as previously expected.

Two brokerages cut their price targets on Cisco stock -- RBC went down to $27 and UBS dropped it to $25.50 -- amid the implications for business spending.

"Our mid-quarter checks on Cisco suggest that enterprise spending remains challenging and there has been further slowing in the U.S., especially in the West Coast region," UBS analyst Nikos Theodosopoulos wrote in a research note.

Cisco shares shed more than 5 percent. Chips also took a hit, with Intel also down more than 5 percent.

Even Boeing shares caved amid the selling pressure, falling half a percent. Earlier, the stock had rallied on news that the U.S. government will reopen bidding for a controversial $35 billion refueling-tanker contract. U.S. Defense Secretary Robert Gates referred to its as "expedited recompetition." The Air Force had initially rewarded the contract to Northrop Grumman and Europe's EADS in February but the decision was met with protests.

Retail chain Steve & Barry's is expected to file for Chapter 11 bankruptcy as early as this week, the Wall Street Journal reported on its website on Tuesday.

But retailers overall, led by discounters, are expected to post slightly better June same-store sales on Thursday due to seasonal weather and tax rebate checks.

The high price of fuel grounded another airline, with ExpressJet Holdings , the parent of ExpressJet Airlines, saying it would suspend branded commercial operations as of Sept. 2.

Northwest Airlines announced plans to cut 2,500 jobs as part of a sweeping capacity reduction in order to offset crippling fuel prices.

Still to Come:

THURSDAY: Monthly retail sales; jobless claims; Bernanke and Paulson go before House panel to discuss Wall Street safety net; Fed's Yellen speaks; Marriott earnings; Chevron interim report
FRIDAY: Import/export prices; international trade; consumer sentiment; Treasury budget; GE earnings; Apple's iPod 3G hits store shelves

Send comments to cindy.perman@nbcuni.com.