U.S. Stocks Strapped With Hefty Losses

Updated from 3:20 p.m. EDT

Stocks in New York fell deep into negative territory Monday as worries over several struggling financial-services companies left investors in a selling mood.

The Dow Jones Industrial Average sank 242 points to 11,386, and the S&P 500 slid 25 points to 1267. The Nasdaq skidded 49 points to 2365. All three lost roughly 2%.

On Friday, the markets closed with substantial daily gains following a report that troubled brokerage Lehman Brothers (LEH Quote) may have found a buyer in Korea Development Bank. Traders were also encouraged by statements from Federal Reserve Chairman Ben Bernanke that suggested the central bank would not be raising interest rates before the end of the year.

Before the new week's trading got underway, Korean financial regulators let some air out of the Lehman news, saying that Korea Development Bank should be careful when making such a risky purchase. Shares of Lehman were down 2.1%.

Mortgage firm Freddie Mac (FRE Quote), another focal point of the credit crunch, saw shares rise 21% on Monday after the firm successfully sold $2 billion worth of three-month and six-month bonds. During the previous week, a less successful bond sale had investors worrying about the company's ability to raise capital.

Freddie's sister company, Fannie Mae (FNM Quote), traded up 14% in sympathy. The two were among the only financial-services stocks marking gains and led among the S&P 500's gainers.

Hugh Johnson, chief investment officer at Johnson Illington Advisors, said that Fannie, Freddie and Lehman remain among the chief concerns of investors and portfolio managers. He said he foresees a government bailout of Fannie and Freddie. "The question is when."