Updated from 2:54 p.m. EDT with new stock prices

Bad vibes at

Merrill Lynch

( MER) and a

depressing home-sales report pervaded the financial sector to render Wednesday's session a decidedly bearish one.

Merrill posted a third-quarter loss of $2.85 a share from continuing operations, or $2.31 billion, to reverse last year's $1.97-per-share profit (excluding items) -- much worse than the up-to-50-cents prediction the New York broker

originally issued earlier this month. Revenue took a 94% nose dive from last year to $577 million, and the firm recorded $7.9 billion in writedowns from its positions in collateral debt obligations and subprime mortgages. The latter item is about 76% higher than the initial projection.

Thomson Financial's estimates called for a loss of 45 cents a share on revenue of $3.25 billion. Standard & Poor's

lowered Merrill's counterparty credit rating to A-plus from AA-minus on the heels of these results, and Fitch Ratings also downgraded the broker. Shares tumbled 5.81% to $63.22.

That dragged on the


Financial Sector Index, which fell 77.52 points, or 0.85%, to 9,085.15. The KBW Bank Index was up 0.58% to 101.77, though, despite losses at

National City

( NCC), whose profit was also cut by credit-market woes.

National's third-quarter earnings fell 70% from last year to 18 cents a share, eroded significantly by a loss of 25 cents a share at its mortgage banking business. Analysts sought 32-cent earnings, excluding special items. Shares of the Cleveland bank sank 89 cents, or 3.72%, to $23.02.

Ambac Financial

( ABK) posted in-line operating earnings, but shares slouched 8.77% to $51.00 after the financial insurer swung to a net loss of $360.6 million, or $3.51 a share, vs. a year-ago profit.

XL Capital

(XL) - Get Report

, another insurer, posted better-than-anticipated third-quarter earnings but lost 1.49% on word that CEO Brian O'Hara and Chairman Michael Esposito will retire in 2008.

Arthur J. Gallagher

(AJG) - Get Report

, an insurance broker, gave up 3.92% following lower-than-expected earnings in that quarter.

Asset manager

Legg Mason's

(LM) - Get Report

growing fiscal second-quarter profits

missed Wall Street's forecast, and credit-rating firm


(MCO) - Get Report

posted income of 51 cents a share that receded from last year and came in 4 cents shy of the mean. Shares lost 3.51% and 3.06%, respectively.

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Suffering one of the sector's biggest price drops, meanwhile, was Los Angeles bank

Hanmi Financial

(HAFC) - Get Report

, which warned that third-quarter earnings will decline at least 20% sequentially. That would mean 25 cents a share or lower against the 33-cent consensus. Shares slumped 23.38%.

In negative analyst research, Bank of America downgraded


(WB) - Get Report

to neutral from buy on the heels of Friday's

dismal third-quarter financials, pulling shares down 1.24% to $45.40.

Prosperity Bancshares

(PRSP) - Get Report

shed 1.46% following a Stifel Nicolaus cut to hold from buy, and Goldman Sachs slashed

Morgan Stanley's

(MS) - Get Report

2007 estimates by 75 cents a share to $7.60. Its stock surrendered 1.15% to $62.89.

Chicago Mercantile Exchange

(CME) - Get Report

, however, was among several exchanges that traded in the green Wednesday after its pro-forma non-GAAP income shot up 68.4% from last year, to $4.31 a share, in the third quarter. That's well above the $4.10 average analyst estimate. Shares climbed $15.40, or 2.43%, to $650.00.


(ICE) - Get Report

added 4.12% ahead of tomorrow's scheduled earnings release, and

Nasdaq Stock Market


traded mostly in positive territory after third-quarter income vaulted to $365 million, or $2.41 a share, boosted by a huge gain from the sale of its London Stock Exchange holdings. A year earlier, Nasdaq made 22 cents a share.

Excluding the LSE sale and other extraordinary items, income came to 42 cents a share, or 3 cents over Street expectations. Nasdaq shares were recently up 42 cents to $42.50.

In other upward moves, insurer


(AFL) - Get Report

rose 4.43% to $61.72 after topping the third-quarter earnings consensus by 3 cents a share, and brokerage

Raymond James Financial

(RJF) - Get Report

gained 6.13% to $34.80 after coming in 2 cents ahead in its fiscal fourth quarter.