The Dow ended below 8,000 for the first time in two months and marked one of the worst inauguration-day declines in history.
Bank stocks led the decline, taking a pounding over worries about mounting losses and the possibility that they will need to raise more capital — or be nationalized.
The Dow Jones Industrial Average shed 332.13, or 4 percent, to close at 7949.09. The last time the Dow closed below 8,000 was Nov. 20. The S&P 500lost 5.3 percentand the Nasdaq skidded 5.8 percent.
The losses today were more than the total losses for last week, when the Dow fell 3.7 percent, the S&P dropped 4.5 percent and the Nasdaq declined 2.7 percent.
Stocks had declined all day, pausing briefly as Barack Obama was sworn in as the 44th president, then resuming their descent to end at session lows.
Expectations for the Obama administration are running high in the face of the deepening recession, questions over the use of TARP funds, the bailout of the Big Three auto makers and more.
The market could enjoy an Obama honeymoon, Brent Wilsey, president of Wilsey Asset Management, told CNBC.
"When I feel the optimism today, how excited everybody is, I think he will have some honeymoon here," the president of Wilsey Asset Management told CNBC.
>> See complete coverage of Obama's presidential inauguration.
But the odds were stacked against any Obama rally today: The Dow Jones Industrial Average has fallen 72 percent of the time on past inauguration days.
And the Dow's 4-percent decline today was one for the record books: It has the distinction of being the worst inauguration-day decline on record since Theodore Roosevelt's first-term inauguration in 1901, when the Dow dropped 4.1 percent. (Though at that time, inauguration day was a holiday, so the 4.1-percent decline happened two days later, when trading resumed.)
All 30 Dow stocks finished lower, with staggering losses in financials: Citigroup, down 20 percent, JPMorgan, down 21 percent, and Bank of America, down a whopping 29 percent.
Bank of America may slash as many as 4,000 jobs in its capital-markets unit, the Financial Times reported, after posting its first quarterly loss in 17 years last week and cut its dividend to a penny a share.
Citigroup said after the closing bell it was slashing its dividend to a penny, something that had been announced in November as part of the bailout agreement with the government. Last week, Citi posted its fifth straight quarterly loss.
State Street plunged 59 percent after the Boston-based bank reported rising unrealized losses in its commercial-paper program and investment portfolio along with lower fourth-quarter profit. State Street, the world's biggest institutional asset manager, said Tuesday net income shrunk to $65 million, or 15 cents per share, compared with $223 million, or 57 cents per share, a year earlier. Analysts had expected 58 cents a share.
PNC Financial Services tumbled 42 percent amid concerns that the regional bank might take more losses or need more capital to absorb National City bank.
And overseas, the Bank of Scotland posted the biggest loss in UK corporate history, while the U.K. delivered a second round of stimulus to its banking sector.
Johnson & Johnson shares slipped 1.2 percent after the Dow component narrowly beat Wall Street expectations but disappointed with its outlook.
And, the layoff news continued: Time Warner's Warner Bros. Entertainment unit said it would cut about 800 jobs, or 10 percent of its staff, in the next few weeks.
Verizon, Procter & Gamble and AT&T were the best performers on the Dow, though all three posted modest declines.
Shares of New York Times slipped even as the struggling newspaper publisher got a boost from news that one of the world's richest men, Mexican billionaire Carlos Slim, will invest $250 million in the company, becoming one of its largest shareholders.
Consolidation continued in the auto sector as Italian auto maker Fiat agreed to take a 35 percent stake in privately-held Chrysler. Instead of paying cash, Fiat will cover the costs of retooling one or more Chrysler plants in the U.S. to make Fiat cars.
And American International Group’s chief investment officer will step down, according to the Wall Street Journal. Win Neuger will move to a different role within the insurance giant, the report said.
This Week:
TUESDAY: Obama inauguration day; Earnings after the bell from IBM, CSX
WEDNESDAY: Weekly mortgage applications; Earnings from United Tech, Abbott Labs, Northern Trust, US Bancorp; Burlington Northern
THURSDAY: Housing starts; jobless claims; crude inventories; Earnings from Nokia, Fifth Third Bancorp; KeyCorp; Southwest Air; SunTrust Banks; United Health, Union Pacific, Microsoft, AMD, Capital One
FRIDAY: Natural-gas inventories; Earnings from GE, Harley-Davidson and Xerox
ALL WEEK: Detroit Auto Show (Jan. 11-25)
Send comments to cindy.perman@nbcuni.com.
