Banking stocks led Wall Street lower on Monday in a thinly traded session as investors focused on the euro zone's uncertain economic outlook.

Shares of the biggest financial institutions dropped sharply, with Bank of America Corp off 3.3 percent, briefly hitting $5 a share, its lowest since March 2009. Citigroup Inc fell 4.3 percent to $24.91 while the S&P Financial sector <.GSPF> lost 1.7 percent.

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

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.

With so many concerns... volume so slow, there's nothing to take us higher or significantly lower, said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Alabama.

There were signs that cautious investors were rotating into defensive sectors. The S&P healthcare sector <.GSPA> added 0.1 percent, the only group in positive territory.

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 bank shares.

Anything to monkey around with capital requirements will slow down loan growth and slow down earnings, so any sign of tweaking might have an exaggerated effect on trading, Norris said.

The Dow Jones industrial average <.DJI> was down 37.20 points, or 0.31 percent, at 11,829.19. The Standard & Poor's 500 Index <.SPX> was down 7.25 points, or 0.59 percent, at 1,212.41. The Nasdaq Composite Index <.IXIC> was down 12.50 points, or 0.49 percent, at 2,542.83.

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.

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.

Adding to worries, Fitch warned on 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.

In company news, Winn-Dixie Stores Inc surged 71 percent to $9.29 after agreeing to go private in a $560 million all-cash deal with Bi-Lo LLC.

(Reporting by Ryan Vlastelica; Editing by Kenneth Barry)