Bank stocks suffered through another volatile day Tuesday as investors digested both discouraging and encouraging news.

The KBW Bank Index spent most of the day in the red, moving up in the afternoon after the federal government announced a mortgage loan modification program, then closing down 1.84%.

"There's a lot of volatility in the market because there's a lot of uncertainty," said Cassandra Toroian, the president and chief investment officer of Bell Rock Capital LLC in Rehoboth, Del.

Bank stocks may have started the day trading lower because of the late Monday announcement by the Federal Reserve that American Express Co. would become a bank holding company. The announcement probably "rattled some people," Ms. Toroian said.

"We had been a bit concerned about them having some liquidity issues, and now those issues were confirmed" by the Fed's announcement, Ms. Toroian said. American Express shares fell 6.6% Tuesday.

Bank holding company status should ease access by Amex to funds from the Treasury Department's Troubled Asset Relief Program. The Fed said its approval was dependent on the conversion of Amex's industrial loan company, American Express Centurion Bank, to a traditional bank charter.

In the afternoon, a loan modification program was announced by Assistant Treasury Secretary Neel Kashkari in conjunction with officials from the Federal Housing Finance Agency; the Department of Housing and Urban Development; and Hope Now, an alliance between the Bush administration and mortgage servicers to stem foreclosures.

The new program would shrink mortgage payments to 38% of the income of homeowners who are 90 days or more past due on their loans. The payments would be trimmed by modifying interest rates and in some cases forgiving part of the loan principal.

The broader markets also swung upward after the Treasury announcement but fell back in late afternoon trading. The Dow Jones industrial average closed down 1.99%, and the Standard & Poor's 500 index 2.2%.

Citigroup Inc. fell 3.7%. The New York company's CitiMortgage unit said Tuesday that it would modify the terms of up to $20 billion of mortgages for borrowers who are current on their payments. About 130,000 borrowers would be affected.

Downey Financial Corp. fell 68.3%, to 46 cents. The Newport Beach, Calif., company said in a regulatory filing late Monday "substantial doubt" exists that the holding company and its $13.3 billion-asset thrift can "continue as going concerns for a reasonable period of time."

Downey, which posted its fifth-straight quarterly loss last month, said that it has pressing capital needs. It agreed with the Office of Thrift Supervision on Sept. 5 to raise capital by yearend or devise an alternative strategy — namely, finding a buyer.

Both buyers and investors, however, have shied away. Downey has been on the hunt for one or the other since July, without success.

South Financial Group Inc. fell 21%. On Monday, South Carolina Gov. Mark Sanford, a Republican, held a press conference to accuse South Financial Group Inc. in Greenville of planning to use a capital injection from the Treasury to cover the $18 million retirement package for its former chief executive, Mack I. Whittle Jr.

On Oct. 24, the company announced that Mr. Whittle would leave Oct. 27; previously, South Financial had said he would retire by yearend. This led the governor to claim Mr. Whittle's retirement was moved up so South Financial could pay his "golden parachute" with federal bailout money.

The $13.7 billion-asset South Financial denied the accusation, issuing a response late Monday that the terms of Mr. Whittle's retirement were consistent with the provisions of his employment agreement and that the Treasury program's compensation restrictions are not applicable to Mr. Whittle's agreement.

Other bank stocks fell Tuesday. Bank of America Corp. lost 4.1%, Regions Financial Corp. 3.4%, SunTrust Banks Inc. 3.6%, and U.S. Bancorp 3.3%.

The gainers included State Street Corp, 2.3%; KeyCorp, 0.9%; and PacWest Bancorp in San Diego, 0.8%.

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