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A staggering $61.7 billion in quarterly losses at insurer American International Group Inc. touched off fresh fears about the health of the nation's financial system.
The worries pushed the blue chips below 7,000 for the first time since Oct. 28, 1997 and then below 6,900 for the first time since May 1, 1997. The credit crisis and recession have now slashed half the average's value since it hit a record high over 14,000 in October 2007.
Investors are fleeing financials after the government said it would give AIG another $30 billion in loans, besides the $150 billion it has already injected into the company. Investors are worried about European financial companies, too. HSBC PLC, Europe's largest bank by market value, reported a 70 percent drop in 2008 earnings and said it needs to raise $17.7 billion and cut 6,100 jobs.
"As bad as things are, they can still get worse, and get a lot worse," said Bill Strazzullo, chief market strategist for Bell Curve Trading. Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
The "game-changer," he said, will be the housing market and whether it can stabilize.
In midday trading, the Dow fell 226.52, or 3.2 percent, to 6,836.41. The Dow last closed below the 7,000 level on May 1, 1997.
Broader stock indicators also slid. The Standard & Poor's 500 index fell 26.19, or 3.6 percent, to 708.90, and the Nasdaq composite index fell 38.84, or 2.8 percent, to 1,339.00.
The Russell 2000 index of smaller companies fell 16.81, or 4.3 percent, to 372.21.
Nearly 10 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 758.9 million shares.
Bond prices jumped as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, tumbled to 2.90 percent from 3.02 percent late Friday. The yield on the three-month T-bill, considered one of the safest investments, slipped to 0.24 percent from 0.25 percent Friday.
The dollar rose against most other major currencies, while gold prices fell.
Light, sweet crude fell $4.36 to $40.40 a barrel on the New York Mercantile Exchange.
Mixed economic readings on Monday weren't enough to prop up stocks.
Personal spending rose 0.6 percent in January and incomes rose 0.4 percent, while construction spending fell 3.3 percent, more than twice as much as economists expected. Manufacturing contracted in February for the 13th straight month, but at a slower pace than expected.
Meanwhile, billionaire investor Warren Buffett wrote in his annual letter to investors Saturday he is sure "the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall."
AIG rose 6 cents, or 14.5 percent, to 48 cents a share after the government pledged the latest round of money.
HSBC Holdings fell $6.82, or 19.6 percent, to $27.98.
Other financials also fell sharply. Bank of America Corp. fell 56 cents, or 14.2 percent, to $3.39. Regional banks lost ground as well. Fifth Third Bancorp fell 18 cents, or 8.6 percent, to $1.93, while Huntington Bancshares Inc. fell 14 cents, or 9.6 percent, to $1.32.
Even banks that investors consider to be in better shape took hits. JPMorgan Chase & Co. slid $1.32, or 5.8 percent, to $21.53. Wells Fargo & Co. fell $1.41, or 11.7 percent, to $10.69.
In afternoon trading, Britain's FTSE 100 tumbled 5.3 percent, Germany's DAX index fell 3.5 percent, and France's CAC-40 fell 4.5 percent. Earlier, Japan's Nikkei stock average dropped 3.8 percent and Hong Kong's Hang Seng index fell 3.9 percent.