Updated from 1:50 p.m. EDT

Financial stocks bounced higher to recover from some of Friday's steep losses as the sector was lifted by positive analyst notes and Freedom Acquisition Holdings ( FRH), which leapt 7% to $11.18 after announcing a reverse $3.4 billion merger with Britain-based GLG Partners.

Freedom agreed to pay $1 billion in cash and 230 million of its shares in order to form a publicly traded company called GLG, of which Freedom holders will own about a 28% stake (per Freedom's closing price Friday). Current GLG holders have also agreed to reinvest about half of their after-tax cash proceeds into GLG's funds on closing, which should occur early in the fourth quarter.

New York-based Amtrust Financial ( AFSI) jumped 2.4% to $18.70 after the insurance broker agreed to buy a Florida-based workers' compensation insurer, Associated Industries Insurance, for $41.2 million.

Meanwhile, Friedman Billings raised both Meadowbrook Insurance ( MIG) and First Community Bancorp ( FCBP) to outperform, boosting shares of each, by 5.9% and 1.4% respectively.

Cleveland's National City ( NCC) tacked on 1.9% to $33.77 on an upgrade to hold from sell at A.G. Edwards.

Broker Morgan Stanley ( MS) closed down 6 cents to $84.54. Insurer Conseco ( CNO) was up 36 cents to $20.87. Pawnshop operator Cash America International ( CSH) was up $1.04 to $39.97.

Elsewhere, Texas-based financial-services firm Life Partners ( LPHI) rose 5.5% to $37.25 after announcing it had been preliminarily added to the Russell Microcap Index.

Doral Financial ( DRL) was among few financial losers Monday, plummeting 30.6% after FBOP, its second-largest shareholder, dropped its competing takeout bid for the struggling Puerto Rico lender.

The offer, announced earlier this month, would have given current Doral holders $1.41 a share in cash and a 20% stake in the company, vs. a prior Bear Stearns ( BSC)-led proposal for a steeply discounted per-share price and a 10% stake for current holders. Doral investors may now have to settle for the Bear offer. Shares of Doral closed off 49 cents to $1.11.

Also trailing today were subprime-mortgage lender Novastar Financial ( NFI), down 7.2%; brokerage Friedman Billings ( FBR), down 1.2%; and insurer MBIA ( MBI), which slid 3.1% at $61.77.

The NYSE Financial Sector Index was down 0.6%. The KBW Bank Index was down 0.4%.