Updated from 2:02 p.m. EDT

The sliding major indices and negative analyst research kicked financial stocks lower Wednesday as the market reeled from a 12.2% drop in the July pending-home sales index to 89.9, per the National Association of Realtors.

The NYSE Financial Sector Index pulled down 172.76 points, or 1.9%, to around 8,942.84, pressured by the housing data and a number of suffering mortgage concerns. Lender IndyMac Bancorp ( IMB) fell 9.8%. Mortgage investors Impac Mortgage ( IMH) and Luminent Mortgage Capital ( LUM) fell 11.8% and 16.7%, respectively. Subprime lender NovaStar Financial ( NFI) fell 13%.

Also pressuring the NYSE index were Lehman Brothers ( LEH) and Morgan Stanley ( MS), which lost 3.7% and 2.1%, respectively, after both had their third-quarter earnings estimates cut at Citigroup.

The analyst cited an expected decline in fixed-income-trading results and chopped down Lehman's per-share estimate by 55 cents to $1.40 a share. Morgan's estimate was lowered by 15 cents to $1.60.

Credit Suisse ( CS), meanwhile, was downgraded to equal-weight from overweight at Lehman, after which shares traded down 1.7% to close at $66.22. Brookline Bancorp ( BRKL), based in Massachusetts, slumped 3% on a Friedman Billings cut to market perform from outperform. Shares closed off 38 cents at $12.13.

The KBW Bank Index sank 1.9% to 104.79.

Among the sector's movers were Radian Group ( RDN) and MGIC Investment ( MTG), after the companies agreed to terminate their planned stock-swap merger, which in February was worth $4.7 billion.

MGIC had said last month that it's "not obligated" to complete the deal ultimately due to subprime woes at Radian -- an assertion with which the latter disagreed. Today the companies said it's in their communal best interest to remain independent, given "current market conditions" which have made the merger "significantly more challenging." They will also withdraw all outstanding litigation.

Radian shares leapt more than 13% earlier in the day; it closed up 16 cents, or 0.9%, to $18.27. MGIC was up 1.4% earlier in the day but closed down 29 cents, or 1%, at $30.05.

Elsewhere, Chicago Mercantile Exchange ( CME) announced a 78% year-over-year leap in daily August volume to an average of 14.9 million contracts a day. Shares of the commodities exchange tacked on 1% earlier in the day but closed down slightly at $564.50. Online broker TradeStation ( TRAD) added 1.2% to close at $11.39 after saying its August daily average revenue trades soared 83% from last year to about 101,000.

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