NEW YORK (Reuters) – Stocks rose for the third straight day on Thursday, sparked by results from Bank of America and Morgan Stanley and as the latest jobless claims dropped to a near four-year low.

The S&P 500 hit a fresh five-month high, with the industrials, consumer discretionary stocks and financials leading gains.

Tech shares advanced ahead of earnings from a number of bellwethers expected after the close.

But reports after the bell were mixed. Google (GOOG.O) fell short of Wall Street's lofty expectations, and its shares dropped 10 percent to $575.50.

"Google was the big disappointment because so much of their emphasis is developing products, specifically Android, where more dollars are going out than they anticipated," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

In the regular session, Bank of America Corp (BAC.N) climbed 2.4 percent to $6.96 after it reported it swung to a fourth-quarter profit from a year-ago loss. Morgan Stanley (MS.N) reported a loss that was narrower than expected, sparking a 5.4 percent jump in its stock to $18.28.

"We think (financials) have pretty much bottomed here in the U.S.," said Paul Simon, chief investment officer at Tactical Allocation Group in Birmingham, Michigan.

"They represent some compelling value. We think a lot of the bad news has been discounted, and you've seen stock prices rallying in the beginning of the year," said Simon, whose firm has been buying financials.

Financial shares have rallied since the start of the year. The S&P financial index (.GSPF) is up 8.1 percent so far for 2012, helping to push the S&P 500 up 4.5 percent for the year.

In the latest snapshot of the U.S. economy, data showed the number of Americans filing for new jobless benefits dropped to nearly a four-year low last week. It added to views that the economy is slowly moving forward.

The Dow Jones industrial average (.DJI) rose 45.03 points, or 0.36 percent, to end at 12,623.98. The Standard & Poor's 500 Index (.SPX) gained 6.46 points, or 0.49 percent, to 1,314.50. The Nasdaq Composite Index (.IXIC) climbed 18.62 points, or 0.67 percent, to close at 2,788.33.

Semiconductor stocks also advanced, with the PHLX SOX Index (.SOX) rising 1.9 percent. Xilinx Inc (XLNX.O) shot up 1 percent to $35.64 a day after issuing an upbeat forecast.

IBM UP LATE, AMEX SLIPS

Among other major tech companies reporting after the close, IBM (IBM.N) said it sees 10 percent earnings growth in 2012, and its shares rose 2.5 percent to $184.94.

Shares of Microsoft (MSFT.O) gained 1.9 percent to $28.64 in extended trading, and shares of Intel (INTC.O) added 0.5 percent to $25.75, both after reporting results.

American Express (AXP.N) also posted results after the bell, and its shares slid 1.9 percent in extended trading to $49.98.

In a sign of optimism about Europe, both Spain and France drew strong demand at government debt auctions.

With the S&P 500 having broken above the 1,300 level, it looks set to hit the 1,360-1,370 area, said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

"That (area) represents the May 2011 high … and I believe we will see that during this earnings season," Zaro said.

The Dow Jones Transportation Average (.DJT) gained 1.6 percent, with shares of Union Pacific Corp (UNP.N) rising 2.2 percent to $112.18 after reporting quarterly profit and revenue that beat estimates.

Volume totaled about 7.6 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 6.68 billion, and the highest since December 16.

Advancing stocks outnumbered declining ones by a ratio of about 2 to 1 on the New York Stock Exchange. On the Nasdaq, nearly three stocks rose for every two that fell.

(Reporting By Caroline Valetkevitch; Additional reporting by Ryan Vlastelica and Rodrigo Campos; Editing by Jan Paschal)

STRONG BANK EARNINGS: Bank of America rose 2.4 percent and Morgan Stanley rose 5 percent after both banks reported results that were better than analysts were expecting.

GOOD START TO 2012: The stock market is building up a strong start to the year after a tumultuous 2011. The Dow Jones industrial average is up 3.3 percent, and other indexes are up even more: The S&P is already up 4.5 percent and the Nasdaq is up 7 percent.

STEADY AS SHE GOES: The gains have been small, but consistent. The S&P 500 has risen on 12 of the 14 trading days so far this year. It has moved more than one percent on only two of those days.

BANGKOK – Asian stock markets were mixed Wednesday as uneven earnings reports from big U.S. banks dampened investor enthusiasm over successful bond issues in Europe.

Benchmark oil rose above $101 per barrel while the dollar fell against the euro and the yen.

Japan’s Nikkei 225 index rose 0.2 percent to 8,480.99 and Hong Kong’s Hang Seng added 0.4 percent to 19,696.35. But South Korea’s Kospi fell 0.2 percent to 1,888.71 and Australia’s S&P/ASX 200 was flat at 4,215.30.

Benchmarks in Indonesia and Malaysia rose while mainland China and Singapore fell.

Financial shares came under pressure on weak quarterly earnings from some U.S. banks, including Citigroup Inc., which said its fourth-quarter income fell 11 percent due in part to lower investment banking income and an accounting charge.

Australia & New Zealand Banking Group fell 1.1 percent and Hong Kong-listed Agricultural Bank of China slid 1.9 percent.

European shares ended mostly higher Tuesday on the heels of short-term debt auctions by Spain, Greece and Europe’s bailout fund that drew strong investor demand, despite recent credit rating downgrades by Standard & Poor’s.

Many had feared the downgrades would prevent them from obtaining funds and worsen a sovereign debt crisis in Europe.

Other good news came from China, where the government said its economy slowed less dramatically in the fourth quarter than analysts had feared.

China is one of the biggest importers and slower growth could have global repercussions if it cuts demand for iron ore, industrial components and other goods from Australia, Brazil, Southeast Asia and elsewhere.

It would also mean less demand for U.S. and European capital goods for Chinese factories and construction sites, and smaller profits for U.S. and European companies that do business here. The luxury goods industry would also feel a significant pinch, since China is just about the only growth market for those.

On Tuesday, the Dow Jones industrial average rose 0.5 percent to close at 12,482.07. The Standard & Poor’s 500 index gained 0.4 percent to 1,293.67. The Nasdaq composite index added 0.6 percent to 2,728.08.

Benchmark crude for February delivery was up 49 cents to $101.20 per barrel in electronic trading on the New York Mercantile Exchange. The contract finished at $100.71 per barrel in New York on Tuesday.

In currency trading, the euro rose to $1.2779 from $1.2722 late Tuesday in New York. The dollar fell to 76.68 yen from 76.82 yen.

NEW YORK (Reuters) – Bank of America (BAC.N), Goldman Sachs (GS.N) and Citigroup (C.N) could be among companies that beat estimates when they report next week, Thomson Reuters StarMine forecasts show.

Bank of America's forecast by StarMine, which weights forecasts based on analyst accuracy and how recent the estimates are, is 18.4 percent above the consensus estimate, or the average of analysts' forecasts compiled by Thomson Reuters.

A forecast of at least 2 percent above consensus suggests the company is likely to post results above it, according to StarMine.

Goldman Sachs' forecast by StarMine is 2.8 percent above consensus, while Citigroup's forecast is 2.1 percent above, the data showed.

The companies are among 46 Standard & Poor's 500 (.SPX) components expected to report earnings next week.

On Friday, JPMorgan Chase (JPM.N) reported earnings in line with Street estimates. But its stock fell 2.5 percent to $35.92.

Among companies StarMine data has identified as likely to disappoint next week are Freeport-McMoRan (FCX.N), with a StarMine forecast 3.2 percent below consensus, and Fifth Third Bancorp (FITB.O), with a StarMine forecast 4.1 percent below consensus.

The picks are based on comments by analysts who StarMine says have a strong history of being correct with their forecasts.

(Reporting by Caroline Valetkevitch; Editing by Jan Paschal)

PARIS – The specter of Europe’s debt crisis returned Thursday after a brief respite, as bank stocks fell sharply on worries about losses on government debt and a French bond auction drew lackluster demand from investors.

Financial stocks slumped as it became clear banks would have trouble raising billions in new capital in coming months. In Italy, trading in UniCredit shares was halted after they lost a quarter of their value since yesterday morning, when the bank announced it had to offer huge discounts to investors to attract new capital.

The banks need the money to cover potential losses on government debt, whose value has plummeted across most of Europe in recent months on fear of defaults. Many countries in the region have to roll over billions in debt in coming months, putting huge focus on their bond auctions.

France raised euro7.96 billion ($10.31 billion) on Thursday, at the top of its goal, in an auction where demand was solid but far less than at the last sale in December. The borrowing rate for the 10-year bonds, which made up most of the auction amount, rose to 3.29 percent from 3.18 percent last time.

The sale also included 12-year, 24-year and 30-year bonds, and analyst Louise Cooper of BGC Partners said that just the fact that France was auctioning long-term debt indicated its position was fairly solid.

“When countries start to see their funding costs shoot up, then they issue short-term debt as this tends to be cheaper,” she said. “Long-term funding is a sign of confidence in a country.”

But she added that the demand level was “a little worrying, especially as France has a lot of debt to refinance this year.”

The country is under close scrutiny since ratings agencies warned they could strip it of its top AAA grade because of the impact of the crisis and a looming recession on its public finances. A downgrade would likely push France’s borrowing costs even higher.

France’s banks are burdened with huge amounts of government bonds from weak countries like Greece, and boosting them with state money could be expensive — and possibly trigger a downgrade for France.

Formerly routine affairs, European government bond auctions have become tense ordeals during the crisis. Countries that cannot raise money at reasonable rates must be rescued with bailout packages, and investors have grown concerned in recent months that even countries in the so-called European “core” could join that ignominious club. Thus far, only the relatively small economies of Greece, Ireland and Portugal have sought bailouts.

At the very least, if countries like France are forced to pay more to borrow money, they may become unwilling — or unable — to support their smaller neighbors.

After weeks of watching the bond yields of Italy, France and Spain rise, investors got a small respite this week. Germany and Portugal both sold bonds Wednesday at lower rates than previous auctions.

But France’s auction result was not quite as good, while Hungary — a non-euro member of the EU — saw its borrowing rates jump higher in a bond sale of its own. The country’s tense financial situation has deteriorated in recent weeks, pushing it to accept negotiations for a standby loan from the International Monetary Fund.

The bad news helped weaken sentiment in European markets, pushing the euro to $1.2798, a 15-month low against the dollar.

On the secondary market, where the issued bonds are later traded openly, the yield on 10-year bonds in Italy and Spain — both considered too big to bail out — were on the rise. Italy’s rose above the psychologically sensitive level of 7 percent, which is considered unsustainable in the longer term.

European financial stocks were hit hard as the debt worries resurfaced. To protect banks against losses on government bonds, European governments are forcing them to keep more safe capital on hand. But raising that money has proved tricky for some, since investors are reluctant to buy their stock or bonds.

Italy’s largest bank, UniCredit, announced Wednesday it would offer stock at a 69 percent discount to raise cash — a disturbing sign of just how pressed banks are.

More bad news came Thursday, when the Financial Times reported that Spain’s government thinks its banks will have to raise euro50 billion more than previously thought. That news sent Spanish bank stocks tumbling and contributed to losses in other countries. France’s Societe Generale SA was down 5 percent, for example.

The continued volatility in markets is another sign that investors don’t put much stock in the “solutions” unveiled at a summit last month that committed governments to a new treaty that would give European bureaucrats substantial oversight of their budgets.

Leaders hoped to reassure markets that overspending would never again threaten state solvency, but investors have noted that it does nothing to solve the immediate crisis — the heart of which is rising bond yields — and is unlikely to ever be enacted as strongly as it was conceived anyway.

Instead, they want the European Central Bank step in more forcefully to drive down borrowing costs by buying bonds in the open market, a practice it engages in only modestly right now. Analysts argue that would give governments time to enact longer-term solutions, like restoring credibility in their spending habits and allowing them to invest in growth. For now, governments can only slash spending to woo markets, but that also cripples already anemic growth and threatens to usher in a new recession.

Despite these challenges, French Prime Minister Francois Fillon promised on Thursday that France would invest in growth, by reducing the taxes companies pay on salaries, in the hopes of driving down the unemployment rate, which stands at 9.7 percent ahead of presidential elections this spring.

Fillon said France would cut debt with a new sales tax and by taxing financial transactions.

The latter is controversial since many have argued it will only work if applied across the European Union or even the world. Britain and the U.S. — both of which are major centers of finance — have strongly resisted it.

Fillon vowed France would push ahead.

“It’s normal that all sectors participate in a collective effort, including the financial sector,” he said.

NEW YORK (Reuters) – Banks led Wall Street to gains on Thursday even as Europe struggled again, a sign investors are betting a relatively strong U.S. economy will help U.S. stocks outperform other markets.

Overall gains were small, but banks advanced for a third day, supported by better-than-expected economic data. U.S. financial shares continued to delink from their European peers as investors see more potential for growth in U.S. lending that could offset worries about the euro zone debt crisis.

The KBW bank index (.BKX) rose 2.2 percent, extending the week's advance to about 6 percent. Bank of America Corp (BAC.N) jumped 8.6 percent to $6.31.

"While you do have the European issues, the U.S. banks do have some offsets," said John Manley, the New York-based chief equity strategist at Wells Fargo Funds Management.

"There are signs of potential stability in the housing market and U.S. banks are probably being helped by that."

Traders initially focused on heavy losses in European bank shares, led by UniCredit (CRDI.MI). Italy's largest bank has lost more than 30 percent of its value this week after it priced a share offering meant to shore up its ravaged balance sheet.

Other European bank shares fell, and an index of the region's lenders (.SX7P) tumbled 3.24 percent.

But Manley warned that the problems that made bank stocks some of the worst performers last year still linger.

Bank stocks "can do well in the very long term, they are cheap stocks, but they are cheap for reasons that will not go away any time soon," he said.

The Dow Jones industrial average (.DJI) dipped 2.72 points, or 0.02 percent, to 12,415.70. The S&P 500 Index (.INX) gained 3.76 points, or 0.29 percent, to 1,281.05. The Nasdaq Composite (.IXIC) added 21.50 points, or 0.81 percent, to 2,669.86.

Data on Thursday pointed to a strengthening U.S. economy. More than twice the expected number of private sector jobs were added in December while initial jobless claims dropped 15,000 in the latest week. In addition, the pace of U.S. services growth quickened more than expected in December.

The S&P 500 closed above its 200-day moving average for a third straight day. It was the first time the index has been able to hold above the moving average that long in five months. But relatively low volumes could undermine the upbeat technical picture.

About 7.2 billion shares changed hands on the New York Stock Exchange, the Nasdaq and Amex, compared with last year's daily average of about 7.84 billion shares.

The Nasdaq was boosted by strength in technology shares. Marvell Technology Group (MRVL.O) gained 7.3 percent to $15.23 while Seagate Technology Plc (STX.O) was up 6.4 percent to $17.90.

Underscoring investor focus on home builder stocks, the PHLX housing sector index (.HGX) rose 2.3 percent.

The S&P retail index (.RLX) edged up 0.4 percent as December same store sales rose slightly more than expected, though discounts cut into profits over the holiday shopping season. Target Corp (TGT.N) fell 3 percent to $48.51 while Macy's Inc (M.N) added 3.9 percent to $33.92.

Dendreon Corp (DNDN.O) jumped 39.7 percent to $10.62 after its revenue jumped more than three-fold as sales of its prostate cancer vaccine took off.

Bookstore chain Barnes & Noble Inc (BKS.N) fell 17 percent to $11.24 after it said it may split off its Nook electronic reader business and cut its full-year earnings forecast.

Also on the downside, Tesoro Corp (TSO.N) tumbled 5.9 percent to $22.60 after it forecast a fourth-quarter loss. The warning sent shares of peers Valero Energy Corp (VLO.N) and Marathon Petroleum Corp (MPC.N) lower.

On the New York Stock Exchange about three issues advanced for every two that declined and on Nasdaq eight rose for every five that fell.

(Reporting by Rodrigo Campos; editing by Kenneth Barry)

NEW YORK (Reuters) – Stocks rose on Thursday led by bank shares as investors bet a stronger economy will help boost balance sheets of U.S. based lenders.

U.S. financial shares continued to delink from European peers, indicating investors were taking a closer look at the sector and finding bargains.

U.S. banks as measured by the KBW index (.BKX) posted their third day of gains, extending the week's advance to more than 6 percent. Bank of America Corp (BAC.N) jumped 7.4 percent to $6.24 and Wells Fargo & Co (WFC.N) gained 2.6 percent to $29.31.

The market opened lower as traders focused on heavy losses in European bank shares, led by UniCredit (CRDI.MI). Italy's largest bank by assets has lost more than 30 percent of its market value this week after it priced a share offering meant to shore up its ravaged balance sheet.

Other European banks followed suit, and an index of the region's lenders' shares (.SX7P) tumbled 3.2 percent.

"Maybe we are so far ahead of where European banks are in terms of our banks having sufficient capital it gave investors some comfort," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

"It is a telling sign of the strength of the overall U.S. economy because they provide the raw material for businesses to grow."

Data continued to point to a strengthening U.S. economy. More than twice the expected number of private sector jobs were added in December while initial jobless claims dropped 15,000 in the latest week. In addition, the pace of U.S. services growth quickened more than expected in December.

The Dow Jones industrial average (.DJI) rose 17.03 points, or 0.14 percent, to 12,435.45. The S&P 500 Index (.INX) added 5.01 points, or 0.39 percent, to 1,282.31. The Nasdaq Composite (.IXIC) gained 22.97 points, or 0.87 percent, to 2,671.33.

Despite solid demand for a French government debt sale, investors fretted about more fragile economies, such as Italy and Spain. The euro, which has been closely correlated to global equities, fell to a 15-month low against the dollar.

The Nasdaq was boosted by strength in technology shares. Marvell Technology Group Ltd (MRVL.O) gained 6.6 percent to $15.12 while Seagate Technology Plc (STX.O) was up 5.3 percent to $17.71.

The S&P retail index (.RLX) edged up 0.2 percent as December sales rose, though discounts cut into profits over the holiday shopping season. Target Corp (TGT.N) fell 3.1 percent to $48.45 while Macy's Inc (M.N) added 3.6 percent to $33.82.

Dendreon Corp (DNDN.O) jumped 37.3 percent to $10.43 after its revenue jumped more than three-fold as sales of its prostate cancer vaccine took off.

Bookstore chain Barnes & Noble Inc (BKS.N) fell 18.3 percent to $11.07 after it said it may split off its Nook electronic reader business and cut its full-year earnings forecast.

Also on the downside, Tesoro Corp (TSO.N) tumbled 7 percent to $22.36 after it forecast a fourth-quarter loss. The warning sent shares of peers Valero Energy Corp (VLO.N) and Marathon Petroleum Corp (MPC.N) lower.

(Reporting by Rodrigo Campos; editing by Jeffrey Benkoe)

BANGKOK – Asian stock markets were mostly lower Thursday amid new signs of pressure on Europe’s banking system and a downturn on Wall Street.

Benchmark oil lingered above $99 per barrel while the dollar rose against the euro but fell against the yen.

Japan’s Nikkei 225 index fell 0.7 percent to 8,367.73. Hong Kong’s Hang Seng Index was 0.9 percent lower at 18,349.90. Australia’s S&P ASX 200 fell 0.6 percent to 4,064.20. Benchmarks in India and Indonesia were also lower.

But South Korea’s Kospi reversed earlier losses and gained 0.1 percent to 1,827.17. Benchmarks in Singapore and Taiwan also rose after a lower opening. Shares in mainland China and Malaysia were also higher. Overall, stock markets were quieter than normal as many traders go on vacation the week between Christmas and New Year’s.

Investor sentiment waned hours after the European Central Bank said banks had parked $590.72 billion with it overnight, surpassing the record set only Monday. That means European banks were less willing to take the risk of making short-term loans to each other, opting instead to earn low interest rates from the ECB — with money lent by the central bank itself.

Francis Lun, managing director of Lyncean Holdings in Hong Kong, said the action on the part of the banks “defeated the purpose” of the ECB lending operation, which was to spur business activity.

“Investors are disappointed at the development,” Lun said. “Europe still has not found an answer on how to solve its sovereign debt crisis. There’s no solution, and they are trying cosmetic measures, which really do not address the problem.”

The development also shook confidence in the euro, which on Wednesday dropped to $1.2910 — its lowest level against the dollar in nearly a year — before recovering slightly.

“As we have seen time and time again throughout 2011, when EUR/USD falls, so does equities, and so does gold, with traders buying into fixed income assets,” Chris Weston of IG Markets in Melbourne wrote in a research note.

Even successful bond auctions in Italy failed to lift the euro against the dollar. Demand for Italian bonds was strong Wednesday, and the country was able to pay lower interest rates.

Meanwhile, the yen’s rise to a 10-year high against the euro put stress on Japan’s exporters. Kyodo News agency said the euro briefly fell to 100.35 yen in Tokyo, its lowest level against the Japanese currency since June 2001.

Honda Motor Corp. fell 1.4 percent. Sharp Corp. shed 3.6 percent. Yamaha Motor Corp. and Suzuki Motor Corp. both lost 1 percent.

Commodity shares in Australia came under pressure amid worries about the state of the global economy. Gold miner Newcrest Mining Ltd. lost 3.1 percent. Woodside Petroleum fell 1.1 percent. OZ Minerals fell 3.3 percent after the company said copper concentrate may have spilled from a derailed train.

In currency trading Thursday, the euro fell to $1.2929 from $1.2941 late Wednesday in New York. The dollar fell to 77.72 yen from 77.91 yen.

On Wall Street, the Dow Jones industrial average fell 1.1 percent to 12,151.41. The S&P 500 fell 1.3 percent to 1,249.64. The Nasdaq composite declined 1.3 percent to 2,589.98.

Benchmark crude for February delivery rose 6 cents to $99.42 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell $1.98 to settle at $99.36 in New York on Wednesday.

BANGKOK – Asian stock markets slumped Thursday amid new signs of pressure on Europe’s banking system and a downturn on Wall Street.

Benchmark oil lingered above $99 per barrel while the dollar rose against the euro but fell against the yen.

Japan’s Nikkei 225 index fell 0.7 percent to 8,362.33. South Korea’s Kospi lost 0.1 percent to 1,823.44 and Hong Kong’s Hang Seng Index was 0.9 percent lower at 18,348.95.

Benchmarks in Singapore, Taiwan and Indonesia were also lower, while Malaysia and the Philippines rose and mainland China was mostly flat. Overall, stock markets were quieter than normal as many traders go on vacation the week between Christmas and New Year’s.

Investor sentiment waned hours after the European Central Bank said banks had parked $590.72 billion with it overnight, surpassing the record set only Monday. That means European banks were less willing to take the risk of making short-term loans to each other, opting instead to earn low interest rates from the ECB.

The move shook confidence in the euro currency, which on Wednesday dropped to $1.2910 — its lowest level against the dollar in nearly a year — before recovering slightly.

“As we have seen time and time again throughout 2011, when EUR/USD falls, so does equities, and so does gold, with traders buying into fixed income assets,” Chris Weston of IG Markets in Melbourne wrote in a research note.

Even successful bond auctions in Italy failed to lift the euro against the dollar. Demand for Italian bonds was strong Wednesday, and the country was able to pay lower interest rates.

That’s a sign that investors are more confident about Italy’s ability to repay its debt. The country recently passed a big package of budget-cutting measures.

The yen’s rise to a 10-year high against the euro put stress on Japan’s exporters. Kyodo News agency said the euro briefly fell to 100.35 yen in Tokyo, its lowest level against the Japanese currency since June 2001.

Canon Inc. fell 1 percent and Sharp Corp. shed 3.3 percent. Yamaha Motor Corp. lost 1 percent.

In currency trading Thursday, the euro fell to $1.2927 from $1.2941 late Wednesday in New York. The dollar fell to 77.78 yen from 77.91 yen.

On Wall Street, the Dow Jones industrial average fell 1.1 percent to 12,151.41. The S&P 500 fell 1.3 percent to 1,249.64. The Nasdaq composite declined 1.3 percent to 2,589.98.

Benchmark crude for February delivery rose 19 cents to $99.55 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract fell $1.98 to settle at $99.36 in New York on Wednesday.

NEW YORK (Reuters) – Banking stocks fell sharply on Monday, leading U.S. stocks lower in a low-volume session as investors again focused on the uncertain outlook in the euro zone.

Shares of the biggest U.S. financial institutions dropped sharply, with Bank of America Corp (BAC.N) off 3.9 percent, briefly hitting $5 a share, its lowest since March 2009. Citigroup Inc (C.N) fell 5 percent to $24.72.

Comments from Mario Draghi, president of the European Central Bank, weighed on sentiment anew, after he said the economic outlook faced substantial downside risks, adding that 2012 would be a difficult year for banks.

"Even though he's not calling for that, he highlights it, it's a negative story, and the market reacts to the negative headline," said Ken Polcari, managing director at ICAP Equities in New York.

Draghi, speaking before the European Parliament economics and monetary affairs committee, remained reluctant to buy more bonds of European Union governments, a step some investors believed was key to easing the crisis in the near term.

Traders also cited a Wall Street Journal report that the Federal Reserve was keen for U.S. banks to hold more capital than required by U.S. law as weighing on the bank shares.

Investors eyed developments in North Korea after the death of its leader, Kim Jong-il, and as state-controlled media hailed his untested son as the "Great Successor." [ID:nL3E7NJ1RQ]

After falling nearly 3 percent last week, Monday's losses brought the S&P 500 within striking distance of the 1,200 level, cited by traders as an important support level.

The Dow Jones industrial average (.DJI) dropped 62.06 points, or 0.52 percent, to 11,804.33. The Standard & Poor's 500 Index (.SPX) fell 9.26 points, or 0.76 percent, to 1,210.40. The Nasdaq Composite Index (.IXIC) lost 15.73 points, or 0.62 percent, to 2,539.60.

There were signs that cautious investors were rotating into defensive sectors. The S&P healthcare sector (.GSPA) added 0.2 percent.

Adding to worries, Fitch warned Friday it may downgrade the ratings of France and six other euro zone countries, saying a comprehensive solution to the region's debt crisis was "technically and politically beyond reach".

Major S&P 500 levels to watch this week were 1,200 and 1,260, said Ari Wald, an analyst at BBH Equity Strategy Research Team in New York.

"1,200 is support from the index's downward sloping 100-day moving average and the uptrend connecting its October and November lows. A breach of this demand could stir additional technical selling to 1,130-1,150 intermediate-term support," he said.

"1,260 is resistance from the index's downward sloping 200-day moving average and the downtrend connecting its October and December peaks. A breakout above this supply would argue for continued seasonal strength through the first quarter of 2012."

(Reporting by Edward Krudy; additional reporting by Rodrigo Campos; editing by Jeffrey Benkoe)