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Stocks Hit by Mortgage Fears, China Hike

Stocks plunged on Tuesday as concerns that banks may be forced to repurchase souring mortgage-backed securities exacerbated early weakness following a surprise rate hike by China.

NEW YORK (

TheStreet

) -- Stocks plunged on Tuesday as concerns that banks may be forced to repurchase souring mortgage-backed securities exacerbated early weakness following a surprise rate hike by China.

The

Dow Jones Industrial Average

fell below 11,000 again, shedding 165 points, or 1.5%, to 10,978. The

S&P 500

lost 18 points, or 1.6%, to 1165 and the

Nasdaq

was off by 44 points, or 1.8%, at 2436.

China's move boosted the dollar and sparked a wave of selling in commodity stocks. The Dow's finish below 11,000 was its lowest close since Oct. 7, and the decline in the blue-chip index, which has now fallen in three of the past four sessions, was its biggest since August 11 on both a point and percentage basis. Month-to-date, however, the Dow is still up 1.8%.

Energy stocks led the decline after a surprise 25 basis-point rate hike by China's central bank sparked concerns that the fastest-growing economy will cool its demand for energy and commodities as it fights inflation.

Exxon Mobil

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and

Chevron

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(CVX) - Get Chevron Corporation Report

dropped 1.7% and 2% respectively.

Late in the session, financial stocks swooned as reports surfaced that investors including

Pimco

,

BlackRock

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and the

New York Federal Reserve

were seeking to force

Bank of America to repurchase mortgage-backed securities.

Shares of Bank of America shed 4.4% to close at $11.80.

JPMorgan Chase

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and

Wells Fargo

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were down 1.3% each.

Financials had been trading higher before the Bank of America news report on the back of strong earnings from

Goldman Sach's

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and better-than-expected results from Bank of America.

Before the bell on Tuesday,

Bank of America said its loss widened to $7.3 billion, or 77 cents a share, in the third quarter. Excluding a $10.4 billion goodwill impairment charge, the bank earned $3.1 billion, or 27 cents a share, surpassing estimates for 16 cents a share.

Goldman Sachs shot past expectations with a quarterly profit of $2.98 a share. Goldman's investment banking business was a key driver as revenue in the division jumped 24% year over year to $1.12 billion. The stock still finished 2% higher on Tuesday, despite weakness in financials.

A strong upward move in the dollar sent gold and commodities tumbling sharply on Tuesday. The dollar index was up 1.6%. November crude oil lost $3.60, to trade at $79.49 a barrel, while the December gold contract lost $36.10, or 2.6%, to settle at $1,336 an ounce.

"The surprise move out of China is causing a lot of risk aversion so there's a strong rebound in the dollar. That's hitting commodities and equities," said Peter Cardillo, chief market strategist at Avalon Partners.

James Dailey of Team Asset Strategy says the dollar move was not really driven by China's moves. "China's rate hike is just an excuse in retrospect. Sentiment was just extremely bearish on the dollar and today's move be it in the Australian dollar, oil and gold is just the revenge of the U.S. dollar," he said. Dailey expects the trend will play out only for a few days before reversing.

In economic news, housing starts unexpectedly rose to 610,000 in September from 608,000, previously, while September building permits slumped to 539,000 from 571,000. According to Briefing.com, economists had expected housing starts to decline to 579,000 from 598,000, while building permits were slated to dip to 565,000 from 569,000.

The

SPDR Homebuilders ETF

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declined 0.8%.

Citigroup fell 2.6% to $4.06. The U.S. Treasury Department said it plans to sell another 1.5 billion shares of

Citigroup

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over the next few months as it continues to reduce its holdings in the bank. The government currently has a 12% stake.

Johnson & Johnson

saw shares drop 0.8% to $63.29 following news that it recalled one product lot of 50-count Tylenol bottles, marking the company's fifth recall of over-the-counter drugs because they were emitting strange odors. Also on Tuesday, the company raised its 2010 earnings guidance by a nickel on favorable currency trends after reporting third-quarter earnings of $1.23 a share on sales of $14.98 billion. Consensus estimates called for earnings of $1.15 a share on sales of $15.2 billion, according to a

Wall Street Journal

report.

Earnings continued to remain the main focus of the market.

Late Monday,

Apple

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and

IBM

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beat analysts' top-line and bottom-line expectations. But their earnings beat failed to impress investors, with their forecasts still more conservative than investors expected. Apple shares were down by 2.7% at $309.50, and IBM's stock was off by 3.8% at $138.03.

Yahoo!

(YHOO)

said after the closing bell on Tuesday that its profit doubled on the back of cost cuts and a sale of HotJobs. Excluding items, the company beat estimates by 2 cents. The stock was flat in extended trading.

Boston Scientific

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soared 4.7% in extended trading to $6.19 after it swung to a profit in the third quarter, reporting an earnings per share excluding items of 19 cents blowing past analyst estimates of 6 cents.

Coca-Cola

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said net income rose 8% to $2.055 billion, or 88 cents a share on sales of $8.426 billion. Volume increased by 5%, helped by international markets. Analysts had been looking for earnings of 89 cents a share on sales of $8.3 billion. The stock finished higher by 0.5% to $60.34.

UnitedHealth

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reported a 23% boost to third-quarter earnings, pulling in $1.14 a share on sales of $23.67 billion. Analysts had been looking for earnings of 84 cents a share on sales of $23.31 billion. The stock shed 2.6% to $35.30.

Oilfield servicer

Weatherford International

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topped analysts' estimates by a penny but reported sales that were $500 million below what Wall Street expected. The company expects continued improvement in the fourth-quarter and in 2011, but shares slumped 6.7% to $17.17.

Shares of

EMC

(EMC)

rose 0.1% to $20.85 despite record third-quarter sales of $4.21 billion and earnings of 30 cents a share that were in line with analysts' estimates.

Bank of New York Mellon

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missed estimates for a third-quarter profit of 54 cents a share with earnings from continuing operations of 51 cents a share. Shares were down by 2.4% to $25.99.

The benchmark 10-year Treasury note rose 10/32, decreasing the yield to 2.479%.

Overseas, Hong Kong's Hang Seng gained 1.3% and Japan's Nikkei added 0.4%. The FTSE in London slipped 0.7% while the DAX in Frankfurt lost 0.4%.

--Written by Melinda Peer and Shanthi Venkataraman in New York

.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.