Wall St drops on bank levy worries, Alcoa

U.S. stocks slid in a broad selloff on Tuesday as investors pummeled financials on concerns about a potential government levy on banks, while Alcoa Inc's disappointing results tempered optimism about the economic recovery.

The benchmark S&P 500 broke a six-day streak of gains as banks led the financial sector lower, sending the KBW bank index <.BKX> down almost 2 percent. Shares of Bank of America dropped 3.4 percent, while Citigroup shed 3 percent and JPMorgan declined 2.3 percent.

President Barack Obama is considering a levy on financial services firms to recoup losses from the Troubled Asset Relief Program as part of the fiscal 2011 budget he will unveil in February, according to a senior U.S. official.

Treasury has provided the White House's Office of Management and Budget with a new estimate that TARP will ultimately cost U.S. taxpayers about $120 billion -- down from a $141 billion estimate on December 6, a government source said. The final estimate is likely to decline even further.

Investors feared that a levy might hurt bank profits at a time when the sector was trying to recover from the financial crisis, analysts said.

Talk of a levy creates even more uncertainty for the market and that's the reason for the financials to pull back, said Quincy Krosby, market strategist with Prudential Financial in Newark, New Jersey. The sooner they can clarify the rumors the better for the market. Investors need to hear the specifics regarding this potential proposal.

The Dow Jones industrial average <.DJI> dropped 36.73 points, or 0.34 percent, to 10,627.26. The Standard & Poor's 500 Index <.SPX> fell 10.76 points, or 0.94 percent, to 1,136.22. The Nasdaq Composite Index <.IXIC> slid 30.10 points, or 1.30 percent, to 2,282.31.

Shares of Alcoa, a Dow component, fell 11.1 percent to $15.52, their biggest one-day percentage slide since March as the aluminum company's weaker-than-expected results weighed on sentiment.

Investors had hoped Alcoa would kick off the latest quarterly earnings season on a positive note after their bets on a more upbeat economic recovery sent Wall Street to 15-month highs.

News that China's central bank was tightening monetary conditions in response to increasing concerns about the economy overheating added to the negative tone.

Any potential pullback in Chinese demand will be a major setback for exporters, who include commodity companies like Alcoa. Shares of other big manufacturers took a knock, with Caterpillar Inc sliding nearly 3 percent to $62.24 and Newmont Mining falling 3.3 percent to $48.52.

The S&P materials <.GSPM> index declined nearly 2 percent.

Technology, which along with financials led the market's run-up from the March 2009 lows, was not spared. Apple Inc shares fell 1.1 percent to $207.72. The semiconductor index <.SOXX> slid 3.6 percent.

The banking sector faced another potential hit after the Federal Deposit Insurance Corp floated a proposal that banks whose compensation plans encourage risk-taking would have to pay more for deposit insurance.

Shares of big banks fared worse than their regional counterparts.

Bank of America, which on Tuesday was sued by U.S. securities regulators for a second time over its takeover of Merrill Lynch & Co, fell to $16.36, while Citigroup dropped to $3.52 and JPMorgan fell to $43.49.

Chevron Corp said its fourth-quarter profit would be sharply lower than the previous quarter, sending its shares down 0.6 percent to $80.41. Electronic Arts Inc cut its fiscal 2010 forecast, citing weak holiday sales in Europe. The video game publisher lost 7.8 percent to $16.85.

Even so, the S&P 500 is up 68 percent since hitting a bottom in early March 2009.

(Editing by Kenneth Barry)