JPMorgan Chase & Co and Bank of America led bank stocks lower on Tuesday after mortgage lawsuits filed late on Friday aggravated investor fears that the biggest banks could face massive legal liabilities.

Late on Friday, the Federal Housing Finance Agency sued 17 large U.S. banks and financial institutions over $200 billion in subprime mortgage-backed bonds, now owned by Fannie Mae and Freddie Mac.

JPMorgan shares declined 3.4 percent to close at $33.44 and Bank of America Corp dropped 3.6 percent to $6.99, outpacing a 2.5 percent fall for Citigroup Inc shares.

The drop in the share prices of JPMorgan and Bank of America -- the two biggest U.S. banks -- exceeded the 1.7 percent decline in the KBW Bank Index and 0.7 percent decline in the broader S&P 500 Index.

Analysts said investors are becoming concerned the industry faces a long slog of litigation due to toxic mortgages. The suit by Fannie Mae and Freddie Mac's regulator is just the latest addition to those worries.

People are realizing there are no easy solutions and this could drag on for years, said Matt McCormick, portfolio manager with Cincinatti-based Bahl & Gaynor Investment Counsel.

In August, investors pounded the shares of Bank of America -- the largest U.S. bank -- on fears it would need to raise as much as $50 billion in capital to absorb mortgage losses and fight related litigation.

U.S. banks have recently faced more lawsuits from investors who purchased mortgage-backed securities during the housing boom that are now comprised of toxic home loans.

Investors allege the loans were improperly made and failed to meet guarantees made by the banks at the time they were sold.

Those guarantees -- known as representations and warranties -- are now at the heart of billions of dollars of repurchase claims.

But until Friday, regulators had not sued over the issue.

When you have a regulator suing on behalf of the parties it regulates, that's bad news, said Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods Inc.

The legal worries have been particularly acute at Bank of America, which bought Countrywide Financial Corp -- the country's largest subprime mortgage lender -- in July 2008.

The shares of the Charlotte, North Carolina-based bank have lost half their value this year and plunged by more than 20 percent in early August after insurer American International Group Inc filed a $10 billion suit over mortgages.

The plunge was temporarily arrested by a $5 billion investment in the bank by billionaire Warren Buffett, announced on August 25. The news sent Bank of America shares up by as much as 26 percent.

But on Tuesday, Bank of America shares dipped back to the closing price on the day before the Buffett investment was announced.

(Reporting by Joe Rauch; editing by Andre Grenon)

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