Updated from 11:58 a.m. EDT

U.S. stocks traded erratically Monday, as has been the story for weeks, and ultimately closed lower as the prospect of a global recession continued to loom.

After a lower open and a sizable rally in afternoon trading, the three major averages sold off sharply into the close. The Dow Jones Industrial Average swung in a 450-point range, and then ended with a loss of 203.18 points, or 2.4%, at 8175.77. The S&P 500 lost 27.85 points, or 3.2%, to 848.92. The Nasdaq was down 46.13 points, or 3%, at 1505.90.

When the new week began, financial firms, major players in the global crisis, were in focus. The Financial Times Web site reported that Goldman Sachs ( GS) chief Lloyd Blankfein approached Citigroup ( C) head Vikram Pandit about a merger. Pandit turned down the proposal, which was made in September, the report said. Goldman dropped 7.5% to $92.88, and Citi gave back 3.4% to $11.73.

Also, as the Treasury Department's $700 billion Troubled Asset Relief Program to buy equity stakes in troubled banks got underway, several companies announced their participation in the initiative. Among them, KeyCorp ( KEY) and Huntington Bancshares ( HBAN) announced they would take part in the Treasury plan to purchase stock in banks facing liquidity troubles.

KeyCorp shares edged down 2% to $9.92, and Huntington gained 15% to $9.17.

SunTrust ( STI), meanwhile, said it would slash its dividend 30% and apply to sell stock and warrants to the government. Shares added 0.7% to $35.34.

The Federal Reserve was also working to shore up short-term debt markets and get companies to lend to one another. The Fed said it will give companies a rate of 1.88% for three-month, high-grade commercial paper and buy asset-backed debt for 3.88%. Three-month dollar Libor, a measure of the rate banks charge one another for large loans, ticked down to 3.51% from 3.52% Friday. The overnight Libor rate was at 1.27%.

Kenny Landgraf, president and founder of Kenjol Capital Management, said that the government's actions are welcome, but it will take time for the Fed and Treasury's impact on the crisis to be realized. He said that banks have yet to resume lending, and homeowners and the lending markets face added risks if unemployment rises.

Nevertheless, major financial institutions have benefitted from the intervention. "Morgan Stanley is still in business, and about a month ago they were on the chopping block," said Landgraf. He also pointed to PNC's ( PNC) recent acquisition of National City ( NCC) as evidence that the TARP is helping financial institutions. PNC shed 0.4% to $58.63, and National City slippped 2.4% to $2.02.

Amid speculation that there will be additional interest-rate cuts, European Central Bank chief Jean-Claude Trichet said his agency may cut rates at its Nov. 6 meeting. Expectations of a rate cut from the U.S. Fed increased ahead of its two-day meeting, which begins Tuesday.

Also making headlines was conglomerate Loews Corp. ( L), which said it will buy $1.25 billion of preferred stock in insurer CNA Financial ( CNA). Loews owns a 90% stake in CNA, which swung to a third-quarter loss because of a downturn in its investment portfolio and hurricane-related claims. Loews' stock plummeted 18% to $25.65, while CNA dropped 33% to $11.90.

The state of the U.S. automakers was once again looking precarious. Bloomberg reported that General Motors ( GM) requested support from the Treasury Department to help it merge with Chrysler. GM shares lost 8.4% to $5.45.

Elsewhere on the merger front, CenturyTel ( CTL) reached an agreement to acquire Embarq ( EQ) in a stock swap the companies are valuing at around $11.6 billion. CenturyTel fell 13% to $25.62, and Embarq added 2.2% to $30.38.

As for corporate earnings, telecom-services provider Verizon ( VZ) announced quarterly results that were in line with Wall Street's estimates. The stock climbed 10% to $27.61.

Looking at the day's economic data, the Census Bureau released its September new-home sales figures. The agency reported that September sales came in at an annual rate of 464,000, up from 460,000 in August. Economists were anticipating 450,000 units sold. Inventories, meanwhile, declined to 394,000 from 425,000. However, sales of new houses declined year over year, and home prices hit a four-year low.

In the realm of commodities, crude oil for December delivery lost 93 cents to settle at $63.22 a barrel. Gold climbed $12.60 to $742.90 an ounce.

Longer-dated U.S. Treasury securities were falling in price. The 10-year was down 12/32 to yield 3.73%, and the 30-year was losing 12/32, yielding 4.09%.

The dollar was continuing the wild swings seen at the end of last week, making big gains against the euro and pound but taking losses vs. the yen.

Abroad, European exchanges were mixed, as the FTSE in London edged down and the DAX in Frankfurt gained ground. Asian markets, such as Japan's Nikkei and Hong Kong's Hang Seng, closed on the downside.

( Photo gallery: Trading Faces

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