Sept. 22 (Bloomberg) -- U.S. stocks tumbled, led by banks, retailers and technology companies, as oil jumped 16 percent and investors speculated the Treasury's plan to buy toxic mortgage assets will fail to prevent a recession.

The Standard & Poor's 500 Index lost 3.8 percent, erasing almost half of its rally over the previous two days. Sovereign Bancorp Inc., Marshall & Ilsley Corp. and Washington Mutual Inc. sank more than 21 percent, sending the S&P 500 Banks Index to a record plunge, on concern the government bailout will lower the value of mortgage loans they hold. Apple Inc. and Cisco Systems Inc. dragged down computer stocks on expectations slower growth will reduce sales.

The S&P 500 retreated 47.99 points to 1,207.09. The Dow Jones Industrial Average slid 372.75, or 3.3 percent, to 11,015.69. The Nasdaq Composite Index decreased 94.92, or 4.2 percent, to 2,178.98. Six stocks retreated for each that rose on the New York Stock Exchange in floor volume of 1.3 billion shares, 45 percent below last week's average.

``They really haven't changed the economic fundamentals at all,'' said Jeffrey Coons, co-director of research at Manning & Napier Advisors Inc. in Fairport, New York, which manages $18 billion. ``We still have a debt-laden U.S. consumer facing falling employment.''

Treasury bonds and the dollar tumbled on speculation the U.S. government is spending too much to save banks after the collapse of Lehman Brothers Holdings Inc., Fannie Mae, Freddie Mac and American International Group. Heating oil, gold and copper climbed as the dollar's biggest-ever slide against the euro heightened the risk of inflation.

All 10 industry groups in the S&P 500 lost at least 1 percent.

Regionals Pare Rally

Regions Financial Corp., Marshall & Ilsley and Huntington Bancshares led regional banks to the steepest drop in two months. The group retreated after rising more than 48 percent last week on speculation the companies avoided the worst of the subprime-mortgage crisis. JPMorgan Chase & Co. and Merrill Lynch & Co. advised clients to sell midsized lenders because they won't immediately benefit from the Treasury's mortgage bailout and may have to write down assets based on the prices received by their larger rivals.

``Our initial impression of the plan is that the benefits to the regional banks would be indirect, and as a result, we would lock in substantial profits generated over the past several weeks,'' wrote JPMorgan analysts led by Steven Alexopoulos.

Record Bank Plunge

The S&P 500 Banks Index slumped 12 percent today, the most since the gauge was created in 1989, as all 20 of its companies declined at least 4 percent.

Regions Financial, Alabama's biggest bank, retreated $4.20, or 21 percent, to $15.60, the most since at least 1983. Marshall & Ilsley, the largest bank in Wisconsin, fell $6.68, or 23 percent, to $22.82. Ohio's Huntington slid 23 percent to $9.81. Each bank posted its steepest drop in at least 23 years.

Funding bases for small and mid-cap banks ``may not be as secure as some believe'' as deposits leave for larger banks and borrowing costs become more expensive, Merrill analysts said.

Regions Financial, Marshall & Ilsley and Huntington Bancshares were among the biggest gainers in the S&P 500 on Sept. 19, when the market rally forced sellers of some expiring equity options to buy shares, said Michael McCarty, chief options and equity strategist at Meridian Equity Partners Inc. in New York.

`Artificial Strength'

``You're reversing part of that artificial strength,'' McCarty said.

Large banks also retreated after last week's rally. Citigroup slipped 64 cents, or 3.1 percent, to $20.01 following a two-day advance of more than 47 percent. JPMorgan, the nation's third-biggest by assets, lost $6.25, or 13 percent, to $40.80 after climbing 32 percent on Sept. 18-19.

The S&P 500 Financials Index declined 8.5 percent today. The government's plan to purge banks of toxic assets and crack down on speculators who bet against shares of financial companies sent the group up 24 percent in the final two days of last week.

``Financials are a sell on the big rally they had last week because I don't think the fundamentals have really changed,'' Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said on Bloomberg Television. Raymond James oversees $190 billion.

Homebuilders Tumble

Homebuilders in S&P indexes fell 12 percent, their biggest drop on record, on speculation the bailout plan won't immediately stem the decline in home prices that's left owners unable to refinance mortgages they can no longer afford, leading to a record rate of foreclosures in June. D.R. Horton Inc., the largest U.S. homebuilder by market value, fell 17 percent to $12.55.

General Growth Properties Inc. slid the most since at least 1983, losing 25 percent to $16.08, an almost six-year low. The second-largest U.S. mall owner said it may sell assets or equity to raise capital after a stock slump. The company also said it will consider ``strategic business combinations.''

MGIC Investment Corp., the largest U.S. mortgage insurer, tumbled 32 percent to $6.98 for the biggest drop in the S&P 500.

General Motors Corp. slid $1.50, or 11 percent, to $11.58. Analysts said the automaker's plan to draw the remaining $3.5 billion from a revolving credit line indicates it may be using up available cash at a rapid pace. GM is tapping the balance of the $4.5 billion line as lenders are tightening standards amid the worst U.S. housing market since the Great Depression.

Apple, maker of the iPhone and Macintosh computers, slid 7 percent to $131.05 and Cisco, the biggest computer-networking equipment company, lost 4.9 percent to $23.11. Morgan Stanley cut its 2009 profit estimates for technology companies by an average of 5.6 percent, citing slower global growth.

`Floor' Under Markets

The S&P 500's 8.5 percent, two-day rally at the end of last week was its biggest since the aftermath of the crash of 1987. The gain followed a drop of 7.6 percent over three days that started when Lehman filed for bankruptcy, Merrill Lynch was sold to Bank of America Corp. and the U.S. took control of American International Group Inc.

For Barclays Global Investors's Russ Koesterich, Treasury Secretary Henry Paulson's move to shift the burden of subprime- mortgage related losses to taxpayers ``put a floor under the equity markets.'' James Swanson, who oversees about $200 billion at MFS Investment Management in Boston, says the S&P 500 may rise 15 percent after the Treasury immunized investors from ``the brunt of the economic cycle.''

McDonald's Corp., the world's largest restaurant company, fell $1.41 to $62.57. McDonald's told some U.S. franchisees to seek other ways to finance store improvements after Bank of America declined to increase leasing, underscoring how the diversion of capital to mend the financial system may curtail growth.

Morgan Stanley, Goldman

The Federal Reserve yesterday approved bids by Goldman Sachs Group Inc. and Morgan Stanley to become banks, ending the ascendancy of the securities firms 75 years after Congress separated them from deposit-taking lenders.

Goldman slipped $9.02, or 7 percent, to $120.78 after gaining as much as 4.5 percent. The announcement paves the way for Goldman and Morgan Stanley, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Lehman and Bear Stearns Cos.

Morgan Stanley fell 12 cents to $27.09 after rising as much as 16 percent. Mitsubishi UFJ, Japan's biggest bank, will buy up to 20 percent of the securities firm and decide on a price after conducting due diligence.

Energy Concern

Retailers, hotel chains, restaurants and automakers retreated on prospects that gains in energy prices will hurt earnings. The S&P 500 Consumer Discretionary Index decreased 5 percent, the most since the first trading day after the September 2001 terrorist attacks, as 80 of its 82 companies retreated.

Ford Motor Co., the second-biggest U.S. automaker, slipped 34 cents, or 6.4 percent, to $4.95. UAL Corp., parent of United Airlines, retreated $1.44, or 11 percent, to $11.80. Macy's Inc., the second-biggest U.S. department store chain, fell 7.7 percent to $18.42. Home Depot Inc., the largest home-improvement retailer, slumped 6.4 percent to $25.62.

Oil Climbs

Crude oil for October delivery rallied $16.37 to $120.92 a barrel in New York and has advanced 32 percent since Sept. 16. A slump in the U.S. currency increased the appeal of commodities as a hedge.

Microsoft Corp. rose 24 cents to $25.61. The world's biggest software maker plans to buy back as much as $40 billion in stock and increase its dividend. Microsoft's valuation this year fell to the lowest level since it went public 22 years ago, as measured by share price relative to expected earnings.

Hewlett-Packard Co. slipped $1.10 to $47.16 even after the world's largest personal-computer maker said it may buy back as much as $8 billion in shares, matching its largest repurchase. Nike Inc., the world's biggest maker of athletic shoes, said it will buy back as much as $5 billion of its shares. Nike still fell 55 cents to $63.15.

``Whenever you get a market that's fallen the way it has and stocks are attractive for high-quality companies, it tends to be a very good buying opportunity,'' Manning & Napier's Coons said. ``That's what these companies are looking at.''

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: September 22, 2008 16:50 EDT