"Banks are a little bit delusional right now about when they're going to turn around," said New York-based Fitzgibbon, who has 11 "hold" ratings, three "buys" and two "sells" on the banks he covers, which don't include KeyCorp. "Recessions don't turn around in days or weeks or months. It's a multi-year kind of thing."

Banks Tumble

KeyCorp fell $2.15, or 9.8 percent, to $19.80 at 11:21 a.m. in New York Stock Exchange composite trading. It was the biggest one-day drop since at least Oct. 19, 1987. The stock had declined 6.4 percent this year before today. KeyCorp spokesman Bill Murschel declined additional comment.

Seven of the 24 companies in the KBW Bank Index dropped by more than 4 percent. Fifth Third Bancorp slid as much as 5.5 percent, M&T Bank Corp. lost 5.3 percent and Comerica Inc. declined 5.2 percent. Every one of the banks in the index fell.

KeyCorp's revision yesterday means the bank may have to halve its dividend so it isn't forced to raise more capital, Goldman Sachs Group Inc. analyst Brian Foran said in a note to investors today.

Already, banks holding repossessed properties are offering buyers discounts of as much as 40 percent, according to Moody's Economy.com analyst Celia Chen.

Foreclosures

Banks are concluding that they must unload foreclosed properties to get the properties off their books, said Jeff Davis, an analyst at FTN Midwest Securities in Nashville. Davis rates KeyCorp "neutral."

"We're getting to the point where reality is sinking in and the sellers are cutting prices," Davis said. "The deeper we go into the year, the more foreclosed properties trading hands will impact the data."

Housing woes are equally acute for savings and loans, which boosted loan-loss reserves by 38 percent in the first quarter to $7.6 billion, according to a report yesterday from the Office of Thrift Supervision. Troubled assets, loans 90 or more days overdue, and repossessed assets rose to 2.06 percent of all assets, from 1.66 percent in the fourth quarter, the OTS said.

Nor are investment banks immune. Goldman Sachs, Lehman Brothers Holdings Inc. and Morgan Stanley had their second- quarter profit estimates cut today by JPMorgan Chase & Co. because of asset writedowns and ineffective hedges.

Banks that had projected a recovery starting in the second half of the year may be forced instead to continue building loss reserves and raising capital, Fitzgibbon said.

Lenders, especially in the Southeast and Southwest, are going to be "particularly susceptible to the problems in the housing market, and are likely going to have to radically reevaluate their projections in the coming weeks," Fitzgibbon said.