Stocks sank on Tuesday, driven lower as the strengthening of financial regulation from Wall Street to Frankfurt crushed bank stocks, adding to worries about the sustainability of the global economic recovery.

In Washington, several Republicans will vote with Democrats to wrap up debate on the sweeping reform of financial regulations and move toward final passage, Senate Majority Leader Harry Reid said.

Officials in Germany added to the uncertain future for banks when they suddenly moved to ban naked short selling in the stocks of the country's 10 most important financial institutions. Naked short selling occurs when an investor sells shares without borrowing them first.

The euro hit a four-year low following the news and amid ongoing worries that deep cuts to government budgets will dampen euro-zone growth.

It's a continuation of the uncertainty that's been plaguing the market, both here in the U.S. regarding financial reform, and now is exacerbating an already uncertain environment in Europe, said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Goldman Sachs added to the negative tone when it said in a note to clients that the current financial reform bill's changes could shrink banks' normalized earnings per share by 20 percent.

The Dow Jones industrial average <.DJI> fell 114.88 points, or 1.08 percent, to 10,510.95. The Standard & Poor's 500 Index <.SPX> lost 16.14 points, or 1.42 percent, to 1,120.80. The Nasdaq Composite Index <.IXIC> shed 36.97 points, or 1.57 percent, to 2,317.26.

A strong move on the upside came after the closing bell, though, when Hewlett-Packard Co reported results that beat expectations on good demand for personal computers and servers, and the company raised its full-year earnings outlook. HP's stock rose 2.5 percent to $47.97 in extended trade.

BAILING OUT OF BANKS AND CHIPS

Key senators reached a compromise on the balance of power between state and federal officials on bank oversight that could clear away a long-standing obstacle to passage of a landmark Wall Street reform bill in the U.S. Senate.

Financial stocks led the way down in the regular session, with the S&P financial index <.GSPF> falling 2.8 percent. JPMorgan Chase & Co was down 2.1 percent at $39.00.

Shares of technology companies, which tend to rely heavily on overseas sales, were also among the biggest losers. An index of semiconductor shares <.SOXX> lost 2.9 percent, while Intel Corp dropped 2.7 percent to $21.43.

It's a one-two punch. First, is continuing concern

over the euro and continuing concern over the viability of the (European) Union, and then second, is rotation out of large-cap tech, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Adding to worries over growth were cautious outlooks from retailers, including Wal-Mart , signaling that the recovery in consumer spending might not be as strong as hoped.

Wal-Mart Stores Inc, the world's largest retailer, reported better-than-expected results, driving its stock higher. But the discount behemoth also forecast that second-quarter earnings could fall short of analysts' estimates and U.S. same-store sales for the period could drop.

Shares of Wal-Mart rose 1.8 percent to $53.70.

But the S&P retail index <.RLX> lost 2.5 percent, while TJX Cos Inc fell 3.5 percent to $43.68 after the retailer, known for its moderate prices, gave a disappointing outlook.

Elsewhere on the regulation front, securities regulators are considering halting trades in a company's stock for five minutes if that stock falls precipitously, sources said.

The S&P 500 ended just below 1,121, which had served as a support level marking the 50 percent Fibonacci retracement of the benchmark's decline from its highs in late 2007 to the more than 12-year low hit in March 2009.

In the past 11 weeks, the S&P 500 has mostly traded in a band between 1,121 and below 1,228 -- the 61.8 Fibonacci retracement of that move.

About 11.11 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 9.65 billion.

Declining stocks outnumbered advancing ones on the New York Stock Exchange by a ratio of more than 3 to 1, while on the Nasdaq, nearly three stocks fell for every one that rose.

(Reporting by Leah Schnurr; Additional reporting by Caroline Valetkevitch and Rodrigo Campos; Editing by Jan Paschal)

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