Banking stocks fell sharply on Monday, leading U.S. stocks lower in a low-volume session as investors again focused on the uncertain outlook in the euro zone.

Shares of the biggest U.S. financial institutions dropped sharply, with Bank of America Corp off 3.9 percent, briefly hitting $5 a share, its lowest since March 2009. Citigroup Inc fell 5 percent to $24.72.

Comments from Mario Draghi, president of the European Central Bank, weighed on sentiment anew, after he said the economic outlook faced substantial downside risks, adding that 2012 would be a difficult year for banks.

Even though he's not calling for that, he highlights it, it's a negative story, and the market reacts to the negative headline, said Ken Polcari, managing director at ICAP Equities in New York.

Draghi, speaking before the European Parliament economics and monetary affairs committee, remained reluctant to buy more bonds of European Union governments, a step some investors believed was key to easing the crisis in the near term.

Traders also cited a Wall Street Journal report that the Federal Reserve was keen for U.S. banks to hold more capital than required by U.S. law as weighing on the bank shares.

Investors eyed developments in North Korea after the death of its leader, Kim Jong-il, and as state-controlled media hailed his untested son as the Great Successor. [ID:nL3E7NJ1RQ]

After falling nearly 3 percent last week, Monday's losses brought the S&P 500 within striking distance of the 1,200 level, cited by traders as an important support level.

The Dow Jones industrial average <.DJI> dropped 62.06 points, or 0.52 percent, to 11,804.33. The Standard & Poor's 500 Index <.SPX> fell 9.26 points, or 0.76 percent, to 1,210.40. The Nasdaq Composite Index <.IXIC> lost 15.73 points, or 0.62 percent, to 2,539.60.

There were signs that cautious investors were rotating into defensive sectors. The S&P healthcare sector <.GSPA> added 0.2 percent.

Adding to worries, Fitch warned Friday it may downgrade the ratings of France and six other euro zone countries, saying a comprehensive solution to the region's debt crisis was technically and politically beyond reach.

Major S&P 500 levels to watch this week were 1,200 and 1,260, said Ari Wald, an analyst at BBH Equity Strategy Research Team in New York.

1,200 is support from the index's downward sloping 100-day moving average and the uptrend connecting its October and November lows. A breach of this demand could stir additional technical selling to 1,130-1,150 intermediate-term support, he said.

1,260 is resistance from the index's downward sloping 200-day moving average and the downtrend connecting its October and December peaks. A breakout above this supply would argue for continued seasonal strength through the first quarter of 2012.

(Reporting by Edward Krudy; additional reporting by Rodrigo Campos; editing by Jeffrey Benkoe)