Credit Fears Slam Stocks

Financials tumble, led by weakness in Citi after its downgrade to sell.
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Updated from 4:08 p.m. EST

Stocks began the holiday-shortened week with steep losses Monday as a new wave of credit and subprime fears washed over the market.

The

Dow Jones Industrial Average

lost 218.35 points, or 1.66%, to 12,958.44, only the second time the index has closed below the 13,000 level since mid-August.

Of the Dow's 30 components, only three finished with gains.

General Motors

(GM) - Get Report

led all decliners on the index with an 8.5% loss.

The

S&P 500

fell 25.47 points, or 1.75%, at 1433.27, leaving it just 15 points, or 1%, above its level at the beginning of the year. The

Nasdaq Composite

was weaker by 43.86 points, or 1.66%, at 2593.38.

"We closed in a bad place, looking at the technicals," said Paul Mendelsohn, chief investment strategist with Windham Financial. "There's no rotation, so it shows that traders just want out. This market needs good news quickly, as we're breaking through some critical support lines.

Marc Pado, U.S. market strategist with Cantor Fitzgerald, said that the technical trading range for the Dow is 12,844 to 13,400, the S&P 500 is 1430 to 1490, and the Nasdaq is 2550 to 2700.

"Holding in these ranges this week would be a positive development," he said. "Technically, this is often a tough week for the market. The holiday break means that many will be out of town for Wednesday and Friday. These first few days are important."

Breadth was poor to start the week. On the

New York Stock Exchange

, 4.07 billion shares changed hands, as decliners toppled advancers by a 14-to-3 margin. Volume on the Nasdaq reached 2.14 billion shares, with losers beating winners 4 to 1.

Leading the market down were financial stocks, which were hit again after Goldman Sachs downgraded

Citigroup

(C) - Get Report

. The firm cut Citigroup to sell from neutral on fears about its collateralized debt obligation writedowns. Citigroup lost $2, or 5.9%, to finish at $32.

Goldman also cut its price targets on a number of names in the sector, including

Merrill Lynch

(MER)

,

Morgan Stanley

(MS) - Get Report

and

E*Trade

(ETFC) - Get Report

. All three ended the day lower by 3.4% or more.

Meanwhile,

Swiss Re

said it will write down $1.1 billion because of its exposure to the U.S. subprime mess as well as asset-backed collateralized debt obligations, or CDOs. Shares were off more than 11% in Europe.

"This Swiss Re news is a surprise, as CDOs are a whole new side of the derivative area that we haven't seen defaults in," said Mendelsohn "It would wallop the market if these were to unravel. This is a bad omen and could have a huge effect."

Swiss Re's announcement came after the CEO of

Deutsche Bank

(DB) - Get Report

noted during a conference in Germany that the latest rash of writedowns at U.S. banks "as well as the ongoing uncertainty about losses for some market players who haven't yet outlined their numbers have increased nervousness noticeably."

Among other financial names,

Countrywide Financial

(CFC)

dropped 12.4% to a 52-week low of $10.57.

Bear Stearns

(BSC)

,

JPMorgan Chase

(JPM) - Get Report

and

American Express

(AXP) - Get Report

were all lower by 2% or more.

The Amex Securities Broker/Dealer Index was one of the session's weakest sectors, falling 4%. The NYSE Financial Sector lost 2.9%, and the KBW Bank Index suffered a 2.2% decline.

The latest subprime jitters combined with disappointing views from

Lowe's

(LOW) - Get Report

to dampen the mood. The home-improvement goods retailer lowered its forecast for the year and projected more troubles in 2008. Shares of Lowe's dropped $1.89, or 7.6%, to $23.12.

After the close,

Hewlett-Packard

and

(HPQ) - Get Report

,

Nordstrom

(JWN) - Get Report

each topped estimates with their quarterly results.

There was also some M&A activity making headlines.

Celgene

(CELG) - Get Report

said it will purchase

Pharmion

(PHRM)

in a $2.9 billion cash-and-stock deal. Celgene will pay $72 a share for Pharmion, a 46% premium over the company's closing price Friday.

Pharmion soared 32.1% to close at $65.12. On the other hand, Celgene fell 90 cents, or 1.4%, to $64.

U.S. Treasury bonds were higher, pressuring yields. The 10-year note added 24/32 in price, yielding 4.07%. The 30-year bond gained 30/32, yielding 4.48%.

"Bonds -- especially Treasuries -- continue to be the safe-haven investment, as investors continue to expect the

Federal Reserve

to cut interest rates at their next meeting on Dec. 11 and maybe provide a bit of holiday cheer," said Paul Nolte, director of investments with Hinsdale Associates. "Bond investors will also be watching the retailers on Friday as a gauge of consumer's health."

Commodities were mixed in a volatile session. Crude rose 80 cents to close at $94.64 a barrel, while gold lost $9 to $778 an ounce, and silver was 35 cents lower at $14.16 an ounce.

Overseas markets were uniformly lower. In Asia, Hong Kong's Hang Seng lost 0.6%, and Japan's Nikkei 225 declined 0.7%. Among European bourses, London's FTSE 100 dropped 2.7%, while Germany's Xetra Dax was down 1.3%.