Dow Plunges Below 7000 Level

Updated from 4:24 p.m. EST

Stocks in New York were hammered Monday, with broad-based declines led by financials shaving 4% off the major indices, as the economic downturn and a crisis of confidence continued to wreak havoc on Wall Street.

A triple-digit drop in the Dow Jones Industrial Average put the index below 7000 for the first time since late 1997. It fell 299.64 points, or 4.2%, to 6763.29. The S&P 500 lost 34.27 points, or 4.7%, to 700.82, and the Nasdaq slid 54.99 points, or 4%, to 1322.85.

Citigroup(C) was the weakest component on the Dow, falling 20% to $1.20, but the declines were sweeping. Alcoa(AA) gave up 11.9% to $5.49, and General Electric(GE) and General Motors(GM) tumbled 10.7% apiece.

One of the key stories of the new week was word that the U.S. government would extend another $30 billion in loans to struggling insurer American International Group (AIG) after the firm posted a quarterly loss of $61.7 billion. The new capital comes after $150 billion of taxpayer aid already given to AIG.

Government officials said AIG can decide for itself whether to pay dividends on new preferred shares, and it will get a billion-dollar-a-year break from Washington from easier credit line terms. AIG shares ended the day where they started, at 42 cents.

Those AIG headlines, paired with news Friday that the government was increasing its stake in troubled bank Citi, drive home the idea that policymakers have underestimated how difficult this down cycle for the economy would be, says Brian Bethune, chief U.S. financial economist at IHS Global Insight.

"It reinforces the notion that more resources will be needed to get the financial system stabilized," he says. "They seem to be moving in the right direction, they know what the problems are, but anything that resembles 'three steps forward and two steps back' or lack of a clear goal in terms of how you're going to stabilize the financial market doesn't really break the cycle of declining confidence."