Blue-chip stocks suffered their biggest losses in six weeks Monday and hit new lows for the year on concern that a U.S.-led strike against Iraq will take place soon.
Treasury yields, meanwhile, plunged as investors sought a haven from geopolitical pressures and the wobbly U.S. economy.
"The duration of this Iraq overhang has in itself perhaps caused damage that will take longer to repair" than investors expected, said Bob Sitko, a money manager at USAA Investment Management Co. "It's putting us on hold."
The blue-chip Dow Jones industrial average fell 171.85 points, or 2.2%, to 7,568.18 and the Standard & Poor's 500 index shed 21.41 points, or 2.6%, to 807.48. All 81 financial stocks in the index declined, contributing more than a quarter of the loss. Each market gauge had its biggest decline since Jan. 24 and lowest close since Oct. 10.
The tech-laden Nasdaq composite index, which has held up better during the market's recent travails, sank 26.92 points, or 2.1%, to 1,278.37.
Losers beat winners by 3 to 1 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq. Trading was lackluster as many investors continue to sit on the sidelines.
Markets were rattled by Secretary of State Colin L. Powell's comment Sunday that the probability of war with Iraq "is rapidly increasing."
Fannie Mae slid $4.35 to $58.93, while rival Freddie Mac dropped $3.20 to $50.80 after St. Louis Federal Reserve President William Poole said they may not have enough money on hand to weather a financial shock.
In the bond market, the yield on the two-year Treasury note fell to its lowest level since 1950, sliding to 1.33% from Friday's close of 1.40%. The yield on the benchmark 10-year Treasury note fell to 3.56% from 3.64% on Friday, also a generational low.
"War looks inevitable and the economy looks weaker," said money manager Ken Anderson of Evergreen Investments. "That's adding to the strength in the Treasury markets."
Gold and oil were mixed as investors waited out world events. Gold added $3.90 an ounce to $354.70, while near-month crude futures fell 51 cents to $37.27 a barrel in New York trading.
The dollar lost ground against both the euro and the Japanese yen.
In other highlights Monday:
* UnumProvident, which last month said regulators are reviewing its accounting of investments, was the S&P; 500's worst performer. Moody's Investors Service said it might cut the disability insurer's credit rating to "junk" status. The stock plunged $4.61, or 37%, to $8.
* On a bad day for financial stocks, Bank of America fell $2.15 to $66.84 and Goldman Sachs lost $2.34 to $64.34.
* Concord EFS tumbled $1.83 to $8.52 after the owner of the largest U.S. network of automated teller machines put itself up for sale for as much as $6 billion, people familiar with the situation said. Investors were concerned that the company may lose contracts with firms including Wells Fargo and Bank One that expire next year.
* AMR declined 40 cents to $2.41. The company's American Airlines may file for bankruptcy protection soon if it doesn't get $1.8 billion in concessions sought from workers, a union leader said in a statement posted on the union's Web site.
* Berkshire Hathaway, the insurance and investment company controlled by billionaire Warren Buffett, had its biggest rally in three months after reporting fourth-quarter earnings jumped 12-fold to $772 a share from $63 a year earlier. Berkshire's Class A shares rose $2,900 to $67,700.
* European markets were broadly lower. Key share indexes fell 4.2% in Germany, 1.6% in Britain and 2.4% in France.