Updated from 4:26 p.m. EDT

Financials dragged stocks in New York sharply lower Monday as traders tried to digest a series of deals, another round of earnings and what the CEO of one major bank called "extremely difficult challenges."

The Dow Jones Industrial Average lost 289.60 points, or 3.6%, to 7841.73, with all 30 components in negative territory, while the S&P 500 shed 37.21 points, or 4.3%, to 832.39. The Nasdaq gave up 64.86 points, or 3.9%, to 1608.21.

Immediately after the close, IBM ( IBM) reported a first-quarter profit that was slightly better than expectations, but sales were light. Shares lost 0.8% in the regular session and were down 2.6% in the post market.

Movers of the day included Sun Microsystems ( JAVA), which surged 36.8% to $9.15 on merger news. However, the bulk of the notable winners and losers were on the downside. Citigroup ( C) and Bank of America ( BAC) were off by 19.5% and 24.3%, respectively. The KBW Bank Index fell 15.4%.

Stocks are coming off of their sixth consecutive week of gains in the U.S., marking the largest six-week gain on the Dow since 1938, although the pace has slackened. Wall Street is still mixed on whether the run-up is a bear market rally or a true change of heart.

Anu Sharma, managing director of the Market Intelligence Desk at Nasdaq OMX, says the market is dealing with "two drastically different sentiments." Quarterly reports from the nation's biggest banks have done little to worry the bulls as most have come in well ahead of expectations, although others are quick to point out that expectations were low and the economy is far from improved.

"We're still in a contracting economy, even if it's not at the rapid pace of the end of last year," says Paul Nolte, director of investments at Hinsdale Associates.

Bank of America became the latest of the big banks to top analysts' profit expectations , but CEO Ken Lewis said the bank is facing "extremely difficult challenges," primarily due to deteriorating credit quality. That sent BofA's shares lower at the start of the new week.

Bank of America joins Citigroup, JP Morgan Chase ( JPM) and Goldman Sachs ( GS) in breezing past estimates. But this unexpected performance may be a one-quarter phenomenon as banks are backing away from government aid due to the restrictions that come with it, says Nolte.

"They are going to want to remove those TARP shackles and try to go it on their own, so they won't see additional government dollars coming in that would flow through various business lines," he says.

Some banks like Goldman Sachs are already planning to repay TARP funds. However, President Obama's top economic advisers are simultaneously mulling the conversion of government loans in some of the nation's biggest banks into common stock, according to a report in The New York Times. The Treasury previously negotiated this sort of conversion with Citigroup, turning aid into available capital for the bank and giving the government a bigger ownership stake.

In an effort to reduce its risk profile and strengthen its balance sheet, Swiss bank UBS ( UBS) agreed to sell its Brazilian operation, UBS Pactual, for about $2.5 billion to BTG Investments. Shares fell 8.3% to $11.

Elsewhere, shares of Sun Microsystems soared after Oracle surprised investors with news that it would buy the company for $9.50 a share in a deal valued at $7.4 billion. The news comes after negotiations between IBM and Sun fell apart.

In another deal at the beginning of the week, PepsiCo ( PEP) made a bid to acquire the outstanding shares of Pepsi Bottling Group ( PBG) and PepsiAmericas ( PAS) that it doesn't already own, valuing those companies at $29.50 a share and $23.27 a share, respectively.

PepsiCo fell 4.4% to $49.86, while Pepsi Bottling Group rose 21.9% to $30.73 and PepsiAmericas added 26% to $25.04.

Also, drugmaker GlaxoSmithKline ( GSK) confirmed that it will acquire privately held Stiefel Laboratories for $2.9 billion in cash. Glaxo shares fell 1.8% to $30.05.

Back in earnings, pharmaceutical giant Eli Lilly ( LLY) got past analysts' estimates with some help from rising sales of antidepressant Cymbalta and a drop in costs related to the insulin Humalog. Eli Lilly's shares fell 2.3% to $32.99.

The dollar was mixed. Meanwhile, oil fell $4.45 to settle at $45.88 a barrel, while gold rose $19.60 to $887.50 an ounce.

Longer-dated Treasuries were recently rising, with the 10-year adding 26/32 to yield 2.9% and the 30-year climbing 1-28/32, yielding 3.7%.