Bank stocks fell Thursday as investor excitement about the prospects of the sector's recovery subsided.

The KBW Bank Index fell 9.06% after two more days of gains, including an 11.14% gain Wednesday. Last week the index rose 37.43% with investors growing encouraged that the banking industry could pull itself out of its malaise before the year is out.

"We've been on a very substantial surge upwards in the last six or seven trading days, and there was some profit-taking today," said Greg Gersack, managing principal at FIG Partners LLC.

"Plus, we've had a few downward revisions for the fourth quarter" from banking companies, "and I think people are a little bit cautious in front of first-quarter earnings," Gersack said.

JPMorgan Chase & Co. fell 8%, Bank of America Corp. fell 9.7%, Citigroup Inc. fell 48 cents, to $2.60, Wells Fargo & Co. fell 10.5%, and U.S. Bancorp fell 9.9%.

Citi rose in early morning trading after it said it would ask shareholders for permission to conduct a reverse stock split, which could take place before June 30.

Among regionals, Regions Financial Corp. fell 61 cents, to $4.34, PNC Financial Services Group Inc. fell 8.9%, KeyCorp fell 8.9%, and Synovus Financial Corp. fell 53 cents, to $2.98.

Shares of Pacific Capital Bancorp of Santa Barbara, Calif., fell 11.6%. The $9.6 billion-asset company announced late Wednesday that it was cutting its work force by 22%, or 300 people. It said the move would save Citi about $20 million a year and help it maintain capital.

The Dow Jones industrial average fell 1.15% and the Standard & Poor's 500 fell 1.3%.

The Labor Department said initial unemployment claims for the week that ended March 14 fell 2%, to 646,000 from the prior week. However, the number of people continuing to receive benefits rose to a record 5.47 million.

Shares of Colonial BancGroup Inc. Montgomery, Ala., rose 26.7% Thursday. An investment banker said the increase was largely attributable to short-sellers' decision to partially cover their positions as it becomes harder to borrow shares. The banker, who asked not to be named, said traders were also speculating that losses in the company's residential mortgage book may not be as bad as many believe.

Regulators have instructed Colonial to raise its capital levels by the end of the month. The company also must raise $300 million in private capital before it can receive $550 million in capital from the Treasury Department. Colonial has been in talks to sell stock to a Dallas private-equity firm for $1 to $1.50 a share, but there has been concern that the deal may fall through unless the company's stock can stay above $1 a share. Colonial rose 24 cents, to $1.14.

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