An appearance by flip-flop-wearing Olympic hero Michael Phelps as guest bell ringer wasn't enough to prop up the Dow Jones. Instead, the market tanked late as concerns about the stability at Lehman Brothers Holdings Inc. sent the market down 280 points.
In addition to the Dow's 2.43-percent fall, broader indexes also fell more than 2 percent. The Standard & Poor's 500 index declined 43.28, or 3.41 percent, to 1,224.51 and the Nasdaq composite index fell 59.95, or 2.64 percent, to 2,209.81.bond prices jumped as investors sought the safety of government debt, with the yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.59 percent from 3.68 percent.
Wall Street's pullback nearly erased the biggest single-session gain in a month in the Dow as worries about Lehman punctured a sense of optimism about the financial sector. Investors had been hopeful about the sector after the Treasury Department announced Sunday it would seize control of mortgage finance companies Fannie Mae and Freddie Mac in an effort to help stabilize the troubled housing market.
But worries about Lehman regained investors' attention. Shares of the No. 4 U.S. investment bank lost nearly half their value Tuesday as investors worried that the company was having trouble finding fresh sources of capital. Media reports said a possible investment from South Korea's government owned Korea Development Bank was in doubt.
Many financial companies, including Lehman, have struggled with souring mortgage debt on their books and have looked to outside sources of funding to shore up their balance sheets.
"We're back to the fundamentals again," said Denis Amato, chief investment officer at Ancora Advisors in Cleveland, referring to investors' mentality a day after sending stocks higher. "These financial maneuverings don't create prosperity," he said of the government's steps to aid Fannie and Freddie. "Just because you make some financial change doesn't mean all the sudden the economy gets better."
Oil closed below $104 a barrel for the first time since early April after Hurricane Ike appeared to be headed away from energy installations in the Gulf Coast. In Vienna, OPEC's president signaled the cartel wouldn't cut production. Light, sweet crude fell $3.08 to settle at $103.26.
The dollar was mixed against other major currencies, while gold prices fell.
A weaker-than-expected report on pending U.S. home sales likely added to Wall Street's downbeat mood. The National Association of Realtors said its seasonally adjusted index of pending sales for existing homes fell 3.2 percent to 86.5 from an upwardly revised June reading of 89.4. The index was 6.8 percent below year-ago levels, and missed projections for a reading of 88.6.
Worries about Lehman weighed on the entire financial sector. Lehman shares hit their lowest since the collapse of hedge fund Long-Term Capital Management in 1998. Shares dropped $6.36, or 45 percent, to close at $7.79.
"It's really spooking the market," said Jim Herrick, manager of equity trading at Baird & Co. "Once rumors came out that talks had broken down it caused stocks to have this massive sell-off."
"They don't want another run on the bank," he said.
Investors are worried that Lehman could suffer the same fate as Bear Stearns Cos., which J.P. Morgan Chase & Co. bought after Bear's near collapse in March.
The pessimism comes a day after investors greeted the government's plan to take over Fannie Mae and Freddie Mac with a burst of enthusiasm. Investors had been worried that the companies, which hold or back about half the nation's mortgage debt, would succumb to a spike in bad loans. Fannie Mae jumped 26 cents, or 35.6 percent, to close at 99 cents, while Freddie Mac closed at 88 cents, unchanged from the previous day's session.
Among financial names, Citigroup Inc. fell $1.44, or 7.1 percent, to $18.88, while Morgan Stanley fell $2.87, or 6.6 percent, to $40.40. Merrill Lynch & Co. declined $2.83, or 10.3 percent, to $24.76.
Shares of American International Group Inc. tumbled $4.39, or 19.3 percent, to $18.37, after hitting a new 52-week low of $18.28 earlier in the session.
Energy companies also lost ground as oil fell.
In corporate news, McDonald's Corp. said its same-store sales, or sales at stores open at least a year, rose 4.5 percent in the U.S. in August and 8.5 percent globally. The stock rose 77 cents to $63.19.
The Russell 2000 index of smaller companies fell 21.08, or 2.88 percent, to 711.78.
Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 1.69 billion shares.
Overseas, Japan's Nikkei stock average fell 1.17 percent. Britain's FTSE 100 fell 0.56 percent, Germany's DAX index fell 0.48 percent, and France's CAC-40 declined 1.08 percent.