Bank stocks and the broader market posted early gains Monday after the announcement of a $586 billion Chinese stimulus package, but continued worries about the U.S. economy spurred a heavy retreat to end the day.

The KBW Bank Index fell 2.74% for the day, the Dow Jones industrial average fell 0.82%, and the Standard & Poor's 500 fell 1.27%.

Matt Shields, a trader at FIG Partners LLC, said he thought "it would be a positive day," because of the news out of China. U.S. markets slid "as the European markets started bleeding."

Looking ahead, "I don't know what the catalysts would be to get people buying again," he said.

Theodore Kovaleff, an analyst at Granta Capital Group LLC in New York, said in an interview that bank stock investors remain leery about the future.

There were "a number of egregious losses in the third quarter, and so people are asking themselves, 'What's in store for earnings in the next quarter?' " he said.

Investors were also digesting news of more corporate losses and the U.S. government's decision to buy $40 billion of newly issued preferred shares of American International Group Inc., as part of the Treasury Department's $700 billion Troubled Asset Relief Program. In September, the government gave AIG an emergency $85 billion loan to continue operating.

The government has immediate access to $60 billion in its Tarp program under the original $350 billion authorized by Congress last month. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid wrote Treasury Secretary Henry Paulson a letter Saturday urging him to include Detroit's ailing automakers in the bailout program.

Fannie Mae said Monday that it lost $29 billion, or $13 a share, in the third quarter, largely because of a $21.4 billion noncash charge to reduce the value of tax assets. Analysts on average had expected a loss of $1.60 a share. A year earlier Fannie lost $1.4 billion, or $1.56 a share.

On Monday it also said it might have to apply for Tarp funds as early as next year, and Fannie's shares fell 3%.

Citigroup Inc. fell 5.2%. The Wall Street Journal reported Monday that Citi was in talks to buy an regional banking company that overlaps its retail operations in the Northeast, California, and Texas. A Citi representative would not discuss the matter.

Shares of other large banking companies also slid Monday. Bank of America Corp. lost 4.9%, JPMorgan Chase & Co. fell 3.6%, and Wells Fargo & Co. shed 3%.

Pennsylvania Commerce Bancorp Inc. in Harrisburg agreed to buy Republic Bancorp Inc. in Philadelphia for $110 million of stock. Both companies have connections to Vernon W. Hill 2nd, the former chairman and chief executive officer of Commerce Bancorp Inc. in Cherry Hill, N.J. Mr. Hill was ousted from Commerce before it sold itself to Toronto-Dominion Bank.

Pennsylvania Commerce would rename itself Metro Bancorp Inc. after the purchase. Its shares fell 11.1%, and Republic's rose 0.6%.

Independent Bank Corp. Inc. in Rockland, Mass., said late Sunday that it plans to buy Benjamin Franklin Bancorp Inc. for $125 million of stock. The deal, expected to close in the second quarter, would increase Independent's assets to $4.5 billion.

Shares of Independent fell 6.5%. Benjamin Franklin rose 6.9%.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.