Bank stocks slumped late Tuesday as early optimism about a thawing credit market and industry interest in a government capital-buying program gave way to longer-term worries over credit quality.

The KBW Bank Index was in the black for most of the day, but a slide in the last hour of trading led to a 0.6% decline. The Dow Jones industrial average fell 2.5%, and the Standard & Poor's 500 lost 3.1%.

"Heading into the close, people were just afraid to go long" in the banking sector, said Matt Shields, a bank stock trader at FIG Partners LLC. "There are people jockeying" to take in position in individual companies.

There is optimism about the capital infusion led by the Treasury Department, but many investors are "waiting to see how the program filters down to smaller banks," he said.

The number of applications submitted by the government's Nov. 14 application will be closely watched, he said.

Michael O'Boyle, an investment banker at Sterne, Agee & Leach Inc., said people remain torn between the potential benefits of the capital plan and concerns that credit quality is worsening beyond residential real estate.

"Some credit issues are starting to subside," he said. "The good C&I banks are few and far between, so that remains a concern."

Investors rewarded companies that showed a serious interest in selling preferred stock to the government, as well as those that provided some evidence that credit issues were stabilizing.

KeyCorp shares gained 12.4%, even though the Cleveland company posted a third-quarter loss of $36 million, or 10 cents a share. Analysts on average had expected a profit of 16 cents a share, according to Thomson Reuters.

The loan-loss provision fell 37.1% from the second quarter, and nonperforming assets rose just 2.4%.

KeyCorp said it would likely sell more than $1.1 billion of preferred stock, though a final decision may not come for another two weeks.

Regions Financial Corp. said nonperforming asset growth slowed. Its shares rose 6.1%, even though earnings fell sharply from earlier quarters and missed the average analyst estimates by 12 cents a share.

Excluding $430 million of assets the company has sold or plans to sell, nonperformers rose a mere 1.4% from a quarter earlier. Regions said its board has approved selling an equity stake through the government program.

National City Corp. shares rose 2.4%, though the Cleveland company posted its fifth-straight quarterly loss. Excluding a preferred dividend payout, it lost $729 million, or 85 cents a share, after losing $19 million, or 3 cents a share, a year earlier. Analysts on average had forecast a third-quarter loss of 31 cents a share.

Fifth Third Bancorp shares gained a scant 0.2% after spending much of Tuesday in the red. The company reported a third-quarter loss of $56 million, or 14 cents a share. Analysts on average had expected a profit of 18 cents. The loan-loss provision rose 30.9% from the second quarter and 577% from a year earlier, to $941 million.

U.S. Bancorp shares lost 3% after the company reported that third-quarter earnings fell 47% from a year earlier, to $576 million, or 32 cents a share. It said mounting losses in its mortgage and residential construction portfolios forced it to more than triple its loan-loss provision, to $748 million. Analysts on average had expected earnings of 47 cents a share.

Citigroup Inc. provided evidence that investors are looking beyond third-quarter earnings. Its shares fell 6%. Goldman Sachs Group Inc. added the stock to its "conviction sell" list. William Tanona, a Goldman analyst, wrote in a note that he does not expect Citi to return to profitability until the second half of next year as credit deterioration accelerates.

Citi likely will reserve the $25 billion of capital it gets from the government, instead of deploying it aggressively, Mr. Tanona wrote.

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