Stocks suffered their worst one-day percentage drop since October on Thursday as U.S. President Barack Obama proposed tough restrictions on banks that would squeeze profits.

Major banks slid, with Goldman Sachs falling 4.1 percent despite posting stronger-than-expected fourth-quarter results, and JPMorgan Chase & Co shed 6.6 percent, after Obama proposed limiting how banks invest their own money.

It looks as though banks may be going down the path of being regulated like utilities, said Tom Sowanick, chief investment officer at The Omnivest Group in Princeton, New Jersey.

Obama said banks should no longer be allowed to own, sponsor or invest in hedge funds for proprietary profit. Proprietary trading -- when a firm uses its own money to make bets on markets -- has been an engine of earnings for some major banks.

The proposals must receive congressional approval.

The Dow Jones industrial average <.DJI> fell 213.27 points, or 2.01 percent, to end at 10,389.88. The Standard & Poor's 500 Index <.SPX> was down 21.56 points, or 1.89 percent, at 1,116.48. The Nasdaq Composite Index <.IXIC> was down 25.55 points, or 1.12 percent, at 2,265.70.

The Dow had its worst two-day percentage decline since June, while the Dow and S&P 500 had their worst one-day percentage losses since late October.

It was the second straight day of steep losses for stocks, with the market falling from 15-month highs on Wednesday on worries over China's curbs on bank lending.

After the market's close, shares of Google Inc fell 4.8 percent to $555 after the company reported quarterly results. In regular trading the stock rose to $582.98 on the Nasdaq.

In other markets, the dollar fell and bonds rose in a flight to safety as the stock market tumbled on Obama's announcement.

Shares of Goldman Sachs closed down at $160.87, while JPMorgan Chase ended down at $40.54.

Morgan Stanley fell 4.2 percent to $29.34, while Citigroup fell 5.5 percent to $3.27 and Bank of America dropped 6.2 percent to $15.47.

The Select Sector SPDR Financial ETF was down 2.7 percent.

Also contributing to Wall Street's slide were major energy companies whose shares fell as oil prices dropped 2 percent to $75.92 a barrel.

Exxon Mobil shares were down 2 percent at $66.70. Chevron Corp fell 2.4 percent to $76.24.

The CBOE Volatility index <.VIX>, sometimes called Wall Street's fear gauge, jumped as investors turned cautious after the proposed restrictions on U.S. banks. The VIX was up about 19.2 percent.

Volume on the New York Stock Exchange was 1.5 billion shares, about equal with last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 2.89 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 4 to 1, while declining stocks beat advancers on the Nasdaq by about 10 to 3.

(Additional reporting by Jennifer Ablan; Editing by Kenneth Barry)

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