NEW YORK – Stocks pulled back sharply Wednesday, erasing most of the previous session’s big gains as investors grew concerned about the possibility that banks remain vulnerable to further problems from soured debt. The Dow Jones industrial average fell nearly 300 points after rising 420 on Tuesday.
Some retrenchment was to be expected after the previous day’s huge advance. But the decline also reflects investors’ continuing uneasiness about the world’s financial system and the U.S. economy.
Talk swirled about whether further write-downs are in the offing after Merrill Lynch & Co. filed a lawsuit against a company involved in a debt transaction with the investment bank. Merrill claimed in the litigation that Security Capital Assurance Inc. owed it up to $3.1 billion after backing out of financial transactions.
News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac, a move that could help struggling homeowners, for a time helped quell some of the market’s fears. But it couldn’t stave off selling late in the session by investors who have seen big advances evaporate many times during the course of the credit markets crisis and decided to preserve some of their gains.
Investors sent stocks charging higher Tuesday on stronger-than-expected investment bank results and several moves from the Federal Reserve in recent days, including a 0.75 percentage point rate cut aimed at jump-starting the credit markets. The Dow had its second 400-plus point gain in six sessions.
The Dow fell 293.00, or 2.36 percent, to 12,099.66. Broader stock indicators also declined. The Standard & Poor’s 500 index fell 32.32, or 2.43 percent, to 1,298.42, and the Nasdaq composite index fell 58.30, or 2.57 percent, to 2,209.96.
Gold for April delivery fell $59 to settle at $945.30 on the Nymex; it was the steepest single-session drop for gold since June 2006 and came after gold hit fresh highs Monday.
Overseas, Japan’s Nikkei stock average increased 2.48 percent, while Hong Kong’s Hang Seng index rose 2.26 percent. Britain’s FTSE 100 closed down 1.07 percent, Germany’s DAX index fell 0.50 percent, and France’s CAC-40 declined 0.58 percent.