According to preliminary calculations, the Dow tumbled 254.16, or 3.3 percent, to 7,522.02. The Dow had been down as much as 339 points so the market's ability to end off its lows on light trading volume could signal that the market isn't ready to give up on the rally.
Wall Street's March rally is on hold after the White House rejected turnaround plans from General Motors Corp. and Chrysler and gave investors an economic reality check.
Major indexes fell about 3 percent Monday, including the Dow Jones industrial average, which lost about 254 points but finished well off its lows. Financial stocks weighed heavily on the market amid worries that banks will need fresh injections of capital.
The Dow tumbled 254.16, or 3.3 percent, to 7,522.02. It was down as much as 339 points, so the market's ability to pull abve its lows on light trading volume could signal that investors aren't ready to give up on the rally.
Fears of an automaker bankruptcy have been looming over investors for months, and the latest developments, which included the removal of GM's CEO Rick Wagoner, made the market uneasy not only about the industry, but the overall economy. However, analysts said the pullback, which began with a 148-point drop in the Dow Friday, wasn't surprising after the average surged 21 percent over just 13 days.
"The market had a very significant rally off the lows," said David Katz, chief investment officer at Matrix Asset Advisors. "We think it's just taking a breather."
The Standard & Poor's 500 index fell 28.41, or 3.5 percent, to 787.53, while the Nasdaq composite index fell 43.40, or 2.8 percent, to 1,510.80.
Despite the two-day retreat, the Dow is still up 975 points, or 14.9 percent, from its low on March 9, when it ended at its worst levels since April 1997. The S&P 500 index is still up 16.4 percent from its low.
The March rally was fed by economic and corporate reports that were starting to look more encouraging. Now, investors are taking money out of the market ahead of economic numbers this week and first-quarter earnings in the weeks ahead, fearing that disappointing data, including the government's March employment report on Friday, will set the market back.
Problems still facing automakers and banks gave investors more incentive to sell.
President Barack Obama refused further long-term federal bailouts for GM and Chrysler, saying the companies needed to get more concessions from unions, creditors and others before the money could be approved. He also raised the possibility of controlled bankruptcy for one or both of the companies.
"It was a pretty sharp reminder that there are some difficulties here," said Matt King, chief investment officer at Bell Investment Advisors.
Underscoring the fear that the financial industry's troubles are far from over, Treasury Secretary Timothy Geithner said Sunday banks would likely need considerably more money. Also over the weekend, Spain was forced to bail out a bank for the first time since the financial crisis began. The Bank of Spain took control of a small savings bank and provided $12 billion in government funds to support it.
Banks were a driving force behind the market's rally in March and analysts now expect those shares to see some of the biggest declines as investors become more conservative ahead of the first-quarter earnings reports in the next few weeks. Bank of America Corp. fell 17.8 percent Monday and Citigroup fell 11.8 percent.
Many market watchers had called the recent upturn a bear market rally, or a temporary advance within a bear market, which is defined as a 20 percent drop from a peak level. Bear market rallies can easily come crashing down; that was the fate of the yearend 2008 rally that was more than wiped out during the first quarter.
With the economy still deeply troubled, some analysts say Wall Street may have gotten ahead of itself.
"I think we had a huge run up ... that was not really justified," said Peter Jankovskis, co-chief investment officer at OakBrook investments. "There are a lot of negatives right now on the horizon."
Bank stocks had rallied on the hope that their first-quarter performance would be better than expected. But Friday, the heads of JPMorgan Chase & Co. and Bank of America Corp. diminished some of those hopes when they said March has not been as good for business as the first two months of the year.
"It's just prudent to take profits nowadays," said Ron Weiner, president and chief executive of Westport, Conn.-based investment advisory firm RDM Financial, who recently took half of his money out of a financial-based exchange-traded fund. "You have to mix up cash with alternatives that act opposite from the market."
Bank of America dropped $1.31, or 17.9 percent, to $6.03. Citigroup Inc. shed 31 cents, or 11.8 percent, to $2.31.
GM plunged 92 cents, or 25.4 percent, to $2.70. Chrysler is not publicly traded.
Investors are also awaiting Thursday's meeting in London of G-20 leaders of industrialized and developing countries. The group is expected to increase financial regulation, but investors' hopes for a coordinated fiscal boost are waning. The Financial Times, citing a draft of the meeting's communique, reported there are no specific plans for a fiscal stimulus package.
In other market moves, the Russell 2000 index of smaller companies dropped 13.03, or 3 percent, to 415.97.
About seven stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.5 billion shares.
Bond prices mostly rose as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.72 percent from 2.76 percent late Friday. The yield on the three-month T-bill was at 0.18 percent, up from 0.12 percent Friday.
Crude oil tumbled $3.97, or 7.6 percent, to settle at $47.99 a barrel on the New York Mercantile Exchange.
The dollar was higher against other major currencies. Gold prices slipped.
Overseas, Britain's FTSE 100 fell 3.1 percent, Germany's DAX index fell 5 percent, and France's CAC-40 fell 4.3 percent. Japan's Nikkei stock average fell 4.53 percent.