Wall Street Limits Damage

"The risk of a recession has gone up, because there is a real possibility that these credit problems will have a spillover effect on consumer spending and the broader economy," Hampel said.

Fears were stoked in Friday's session as Countrywide (CFC Quote) said in a Securities and Exchange Commission filing that "unprecedented disruptions" in mortgage securities markets will take their toll on the company over the short-term. The country's largest independent mortgage lender said that if liquidity continues to tighten it would hurt its financial condition.

Also, Washington Mutual (WM Quote) contributed to concerns, noting in its own SEC filing that the problems in the subprime market has spread into other types of nonconforming mortgages. The bank said liquidity in the secondary market has "diminished significantly."

"This is more evidence that the credit problems are not isolated to subprime," said Arthur Hogan, chief market analyst with Jefferies. "This again reminds us that we don't know the extent to which the subprime mortgage and credit derivatives issues are going to spill over into other parts of the financial system."

Concerns about a spillover became an issue in the prior session, when a wave of fear swept over investors after French bank BNP Paribas said it has suspended three of its funds that have exposure to U.S. credit markets. That spurred concerns that liquidity problems in the U.S., caused by increasing problems in the mortgage markets, were spreading globally.