Worry over drop in spending kills stock rally

Stocks closed lower Monday after initial enthusiasm about a $586-billion Chinese stimulus package fizzled and investors succumbed to anxieties about how U.S. companies would survive a severe pullback in spending.

There was little news Monday to placate investors concerned about U.S. corporate health. American International Group got more money from the federal government, but Detroit’s struggling automakers have yet to hear whether they, too, will get aid. And electronics retailer Circuit City Stores filed for bankruptcy protection.

The Dow Jones industrial average fell 73.27, or 0.8%, to 8,870.54, after being up 215 points in early trading and later down as much as 183 points.

It was only the sixth time in eight weeks that the Dow’s daily point change was not in triple digits.

Broader indexes also ended lower. The Standard & Poor’s 500 index fell 11.78 points, or 1.3%, to 919.21, and the Nasdaq composite index fell 30.66 points, or 1.9%, to 1,616.74.

The Russell 2,000 index of smaller-company stocks sank 2.5%.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange.

With stocks trading erratically, investors moved to the relative safety of government debt, pushing down their yields. The three-month Treasury bill’s yield fell to 0.22% from 0.29% on Friday, while the benchmark 10-year T-note fell to 3.75% from 3.77%.

The government said it would invest $40 billion more in AIG, which on Monday reported a nearly $25-billion third-quarter loss. The insurer has received a total of $150 billion in government aid.

The latest infusion helped AIG’s shares rise 17 cents, or 8.1%, to $2.28, but raised worries that problems in the financial sector might be worse than presumed. Financial stocks in the S&P; 500 sank 4.4%.

Citigroup shares fell 61 cents, or 5.2%, to $11.21 on a report that it was in talks to buy a regional bank.

Investors watched for developments with General Motors, Chrysler and Ford Motor after executives of the automakers met with congressional leaders last week in hopes of securing financial help.

Shares of GM plunged $1, or 23%, to $3.36 after a Deutsche Bank analyst predicted the stock price would go to zero within a year. Ford shed 9 cents, or 4.5%, to $1.93.

Circuit City fell 15.5 cents, or 62%, to 9.5 cents a share. The electronics retailer filed for bankruptcy protection about a week after it said it would close 20% of its stores.

Overseas, key stock indexes climbed 5.8% in Japan, 3.5% in Hong Kong, 0.9% in Britain, 1.8% in Germany and 1.1% in France.