Dow Jones: 12,385.16 (-94.57) Nasdaq: 2,765.11 (-24.69) SP 500: 1,305.44 (-10.70):US STOCKS dropped yesterday as bank shares bore the brunt of investor frustration over the inability of governments to solve debt crises in the US and Europe.

With five days to go before President Barack Obama’s deadline for a debt ceiling deal and no agreement in sight, Republicans and Democrats were crafting a fallback plan to avert a US default.

The longer the debt ceiling debate remains unresolved, the bigger the risk for further declines in stocks and a spike in volatility. The CBOE Volatility index rose 7.8 per cent yesterday after a gain of more than 20 per cent last week.

Adding to pressure on financials, the euro zone’s regulatory stress tests for banks were viewed as unrealistically soft, given the scope of the crisis.

“It’s not a good environment for financials,” said Terry Morris, senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania. “The market is really scared right now and it’s a fragile economy that we have, so when you throw something like this in the cake, then you have investors sitting on the sidelines or selling.”

Bank of America hit a new 52-week low and ended down 2.8 per cent to $9.72 while Citigroup lost 1.7 per cent to $37.74. Financials were the weakest SP sector, losing 1.4 per cent.

The Dow Jones dropped 0.76 per cent, the SP 500 declined 0.81 per cent and the Nasdaq Composite fell 0.89 per cent.

Expectations of strong earnings could fuel optimism, but it may not be enough to lift the market from its recent decline. Last week’s encouraging results from Google and JPMorgan Chase were overshadowed by global economic worries that sparked the SP 500’s worst performance in five weeks.

In the latest earnings news, Halliburton reported a 54 per cent jump in quarterly profit as a US onshore drilling boom showed no sign of cooling off. The stock edged up 4 cents to $53.12.

Allstate shares fell 5 per cent to $28.01 after a senior executive left the largest publicly traded US home and car insurer and analysts said the pressure was on management to produce results. The KBW insurance index shed 2.8 per cent.

Declining stocks outnumbered advancing ones on the NYSE by 2,564 to 448, while on the Nasdaq, decliners beat advancers by 2,027 to 543. – (Reuters)