(By Salman - iStockAnalyst Writer)US Stocks retreated sharply on Wednesday on fears of more bank failure in coming days. The past few days have been quite tense for the markets, with Lehman Brothers gone, Merrill Lynch sold to Bank of America and AIG being rescued by US Federal Reserve.

The Dow Jones Industrial Average declined 449.36 points, (-4.1%), to finish at 10,609.66. The S&P 500 fell 57.2 or 4.7%, to 1,156.39 points. The Nasdaq Composite retreated 109.05 points, (-4.9%), to end at 2,098.85. Financials suffered the most in Wednesday’s trading session.

Financial Stocks plunged after the Securities and Exchange Commission stiffened regulations against manipulative short-selling after the routs in AIG and Lehman. In a move to protect investors from so-called "naked" short selling of securities, the SEC has made it mandatory for short sellers and their broker dealers to deliver securities by the close of business on the settlement date, starting Thursday.

Concerns about the solvency of money market funds also weighed upon the markets. On Tuesday, the Reserve Primary Fund, the nation’s oldest money-market mutual fund, fell below $1 a share in net asset value because of losses on debt issued by now-bankrupt Lehman Brothers Holdings. In a statement released on Wednesday, Standard & Poor's said it has placed nine other Reserve Funds on its credit watch list.

The shares of two remaining investment banks, Morgan Stanley (MS) and Goldman Sachs (GS) suffered their biggest one-day losses ever. On Wednesday, Morgan Stanley lost 24% while Goldman Sachs tumbled 14%. According to reports, Morgan Stanley is discussing a possible merger with Wachovia (WB).

Lehman Brothers Inc. (LEH), which filed for bankruptcy on Tuesday, was down 56.7%.

Freshly rescued American International Group Inc. (AIG) extended its decline. According to the rescue plan announced by the government late on Tuesday night, AIG will be extended $85 billion loan in return for which the former will receive 79.9 stakes in the insurer. It is being widely anticipated that the loan will be repaid by liquidating the insurance giant. According to reports, Edward Liddy, AIG's newly appointed CEO, is all set to hold a huge sale of the company's assets in order to pay off the loans.

According to a New York Times report Washington Mutual (WM), the nation's largest savings and loan association, has put itself up for sale. Goldman Sachs (GS), which has been hired to advise WaMu, started an auction several days ago, the newspaper reported. Potential bidders that Goldman has talked to include Wells Fargo (WFC), J.P. Morgan Chase (JPM) and HSBC (HBC), the paper said. The Wall Street Journal reported that Citigroup (C) and Wells Fargo have expressed an interest in buying WaMu. WaMu shares dropped 13% to $2.01. Earlier, Standard & Poor’s had lowered its credit rating on the Washington Mutual bank to “junk.”

SanDisk Corp. (SNDK) jumped 39% to $20.92, after the biggest maker of flash memory rejected the $26-a-share offer bid made by Samsung Electronics Co.

Longs Drugs Stores Inc. (LDG) rejected an unsolicited bid from Walgreen Co. (WAG), recommending instead that shareholders accept a lower offer previously made by CVS Caremark Corp. (CVS)

Gold stocks were on focus on Wednesday as precious metals surged up on investor's flight towards safe haven in the wake of turmoil in financial market. At Comex, Gold for December delivery finished the day up 9% at $850.50 an ounce. Newmont Mining Corp., the largest U.S. gold producer, rose 9.4% to $43.25.

The Commerce Department release on Wednesday showed U.S. Aug. housing starts dropped 6.2% to 895,000, 17-year low, much weaker than the 955,000 rate forecast by economists. Building permits for single- and multiple-family dwellings fell 8.9% to a 854,000 annualized units, with permits for single-family homes dropping 5.1% to 554,000.

European Stocks plunged on Wednesday. U.K. FTSE retreated 2.3% to 4,912.40. The German DAX dropped 1.7% to 5,860.98 and the French CAC fell 2.1% to 4,000.11.

Asian markets too settled deep in red. Hang Seng Index lost 3.6% to finish at 17,637.19.

Nymex crude-oil futures jumped $6.01 to finish at $97.16 a barrel on larger than expected drop in inventories.



Disclosure: The author does not own any of the stocks mentioned.