Wall Street tumbles on renewed bank worries

 NEW YORK | Thu Aug 18, 2011 9:58am EDT   

A trader works on the floor of the New York Stock Exchange, August 17, 2011.

Credit: Reuters/Brendan McDermid

By Rodrigo Campos

NEW YORK (Reuters) - U.S. stocks tumbled 3 percent in early trading on Thursday, weighed down by bank shares, as a report that regulators were intensifying their review of European banks' U.S. units shook up investors.

The KBW bank index fell 4 percent, with Citigroup Inc off 7.2 percent at $27.66, and Morgan Stanley down 6.8 percent at $15.84. Only a handful of the S&P 500 components were in positive territory.

Concerned the European debt crisis might spread to the U.S. banking sector, the Federal Reserve Bank of New York has asked for more information about whether the U.S. bank units of big European banks have reliable access to funds needed to operate, the Wall Street Journal reported.

The selloff "is rooted in the European banking system," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

"It reflects continued concern that sovereign debt issues indicate we're going to have to bail out all those banks again. And if there's stress in major European banks, it will affect U.S. banks too."

The Dow Jones industrial average was down 313.90 points, or 2.75 percent, at 11,096.31. The Standard & Poor's 500 fell 37.25 points, or 3.12 percent, at 1,156.64. The Nasdaq Composite dropped 93.43 points, or 3.72 percent, at 2,418.05.

Investors continued to worry that European policymakers were not doing enough to tackle the euro zone's debt crisis. European blue chips were down 4 percent, with banks down 5.5 percent.

Separate U.S. government reports showed new jobless claims rose more than expected last week, while consumer prices rose faster than expected in July.

Data on leading indicators and home resales as well as the Philadelphia Fed's business activity index are due at 10 a.m. EDT.

(Reporting by Rodrigo Campos; editing by Jeffrey Benkoe)