updated 6/4/2008 9:46:52 AM ET 2008-06-04T13:46:52

Wall Street fell sharply for a second straight day Tuesday as investors grew more worried that the financial sector is still suffering badly from the credit crisis. The Dow Jones industrials dropped more than 100 points, bringing their two-day loss to 235.

Major Market Indices

The market was treading water for much of the session, then tumbled in early afternoon as concerns about financial companies intensified. Reports that Lehman Brothers Holdings Inc. planned to raise $4 billion in capital later expanded into a rumor on trading desks that the investment bank approached the Federal Reserve to borrow money.

Lehman Treasurer Paolo Tonucci quickly refuted the speculation, but the damage had already been done. Lehman dropped as much as 14.5 percent, and dragged down other banks and brokerages and ultimately the rest of the market along with it.

“This market’s very jittery and nervous, and a lot of times you’ll see wild moves, wild gyrations, when it’s driven by rumors and innuendo,” said Jim Herrick, manager of equity trading at Baird & Co., who added that the rumors reminded investors of Bear Stearns’ near-collapse in March.

The Lehman rumors followed a spate of bad news about other financial companies on Monday, including a downgrade of the nation’s four biggest investment banks by rating agency Standard & Poor’s. Separately, anxiety about weak May auto sales figures and fresh concerns about inflation also cut into investor appetite for stocks.

The Dow fell 100.97, or 0.81 percent, to 12,402.85, after being down more than 160 points earlier.

Broader market indexes were also lower. The Standard & Poor’s 500 index dropped 8.02, or 0.58 percent, to 1,377.65, while the Nasdaq composite index fell 11.05, or 0.44 percent, to 2,480.48.

Early in the session, comments from Federal Reserve Chairman Ben Bernanke seemed to support the market. In a speech via satellite to a conference in Barcelona, Spain, the Fed chief reiterated expectations the economy will rebound during the second half due to interest rate cuts, Fed loans to banks and tax rebates.

But he also said the economy faces headwinds with rising prices for food and energy — a signal that interest rates will remain on hold. Inflation-weary investors are wrangling with record oil and gasoline prices, which last month peaked at $135.09 a barrel.

Though oil has since retreated, the fear is that higher energy costs are already hurting strapped consumers whose spending accounts for more than two-thirds of economic growth. Light, sweet crude for July delivery fell $3.45 to settle at $124.31 a barrel on the New York Mercantile Exchange.

Bernanke’s comments set off sharp reactions across other markets. The biggest response came in the dollar, which rallied after Bernanke said he’d remain “attentive” to the sagging currency because of its impact on inflation.

And, government debt was mixed amid expectations that interest rates will be placed on hold. The 10-year Treasury note’s yield, which moves opposite its price, was at 3.90 percent, down from 3.97 percent late Monday.

“There’s still some more bad news to come on credit and the economy, but I think it’s positive that most people think we’re past the peak of the crisis,” said Alexander Paris, market analyst for Chicago-based Barrington Research.

Government data showing a surge in factory orders came in earlier Tuesday, and a barometer of capital spending by U.S. businesses also jumped. Noting that most news regarding the manufacturing sector has been strong in recent weeks, Paris added, “the main concern about the economy is clearly the consumer.”

That was spelled out in auto sales statistics released during the session. Ford Motor Co. said May U.S. sales fell 16 percent compared with last year, while General Motors Corp. said sales were down 28 percent, in part because of strikes at a supplier and several GM plants.

Rick Wagoner, GM’s chairman and CEO, said the company plans to halt production at four North American plants, and is considering a sale of its Hummer brand. Wagoner said high oil prices have altered consumer behavior, and that he believes it is a permanent shift. GM gained 14 cents to $17.58, while Ford rose 4 cents to $6.68.

Lehman and other investment banks dipped to lows not seen since March 17, when the deal that led to JPMorgan Chase & Co. acquisition of Bear Stearns Cos. was announced. The sector recovered much of the drop as the session wore on.

Lehman shares closed down $3.22, or 9.5 percent, at $30.61 despite its treasurer’s denial of rumors about borrowing from the Federal Reserve’s discount window and assertion that the investment bank has sufficient liquidity.

“There’s this long, slow grind in the financials, and the market’s still trying to find the silver bullet to address all of these concerns at the big banks and money centers,” Craig Peckham, market strategist at Jefferies & Co. .

The Russell 2000 index of smaller companies fell 2.02, or 0.27 percent, to 739.00.

Declining issues outpaced advancers by 3 to 2 on the New York Stock Exchange, where volume came to 1.32 billion shares.

Overseas, Japan’s Nikkei stock average closed down 1.60 percent. In afternoon trading, Britain’s FTSE 100 closed up 0.83 percent, Germany’s DAX index added 0.15 percent, and France’s CAC-40 rose 0.98 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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