Global stocks slip on renewed financial jitters

The failure of two small U.S. banks over the weekend re-ignited jitters about the financial stocks. Banking shares were the biggest drag on Europe's leading stock index, and among the biggest drags on major U.S. stock indexes.

The dollar eased as persistent credit worries cast a pall over the health of the U.S. economy despite last week's upbeat housing and consumer sentiment data.

Concern over the embattled U.S. financial sector was heightened after Merrill Lynch said Lehman Brothers Holdings Inc LEH.N may post a loss in the third quarter and take an additional $2.5 billion write-down on home loans. Lehman shares dropped 4 percent to $16.50.

"People are just very skittish here... you still have all the worries about the financial sector," said Richard Lee, managing director of fixed income at brokerage Wall Street Access in New York.

Late Friday, the Federal Deposit Insurance Corp seized two small U.S. banks, First National Bank of Nevada and First Heritage Bank NA of California, and sold them to the Mutual Omaha Bank.

Investors sold bank shares amid doubts a rescue plan approved by Congress over the weekend would stem housing market turmoil, and the International Monetary Fund underlined that the worst of the credit crisis may not be over.

Global markets remain under strain from the U.S. housing crisis and fragile financial markets has made it more difficult for central banks to hike rates to fight inflation, the IMF said in a semiannual report on global financial stability.

"People are still afraid of the bad news from the financial sector," said Victor Pugliese, director of listed equity trading at Broadpoint Securities in San Francisco.

"Any time you see a bank failing, whether it's a big bank or a small bank, it's going to be a problem because it says financials are not out of the woods."

Citigroup C.N fell more than 4 percent and Bank of America BAC.N was off almost 2 percent in the United States. Both weighed on the Dow industrials and the broad S&P 500.

Banks also fell in Europe, where Citigroup cut its stance on banks to "underweight" from "neutral."

UBS UBSN.VX fell 5.5 percent, Royal Bank of Scotland RBS.L dropped 4.1 percent and Barclays BARC.L lost 5 percent.

"There is a deep-seated problem with many of these banks," said David Buik of Cantor Index in London.

Before 1 p.m., the Dow Jones industrial average .DJI fell 163.00 points, or 1.43 percent, at 11,207.69. The Standard & Poor's 500 Index .SPX fell 12.31 points, or 0.98 percent, at 1,245.45. The Nasdaq Composite Index .IXIC fell 27.95 points, or 1.21 percent, at 2,282.58.

Government debt prices rose in light trade as many investors hesitated to make decisions before a monthly reading of nonfarm U.S. payrolls on Friday, often a key catalyst for the bond market.

The benchmark 10-year U.S. Treasury note US10YTRR rose 26/32 to yield at 4.01 percent. The 30-year U.S. Treasury bond US30YTRR rose 45/32 to yield 4.60 percent.

The pan-European FTSEurofirst 300 .FTEU3 index closed down 0.9 percent at 1,158.86 points, falling for a third session in a row.

But the stock market's fall was cushioned by buoyant mining shares, helped by gains in metal prices, while energy stocks rose ahead of key quarterly results in the sector expected this week and as oil recovered from a recent sharp drop.

Royal Dutch Shell RDSa.L, BP BP.L and Total TOTF.PA rose slightly as crude oil CLc1 edged higher.

Oil rose toward $124 a barrel after an attack on Nigeria's crude industry cut output, but signs of faltering U.S. demand limited gains.

The U.S. Transportation Department said the number of miles driven on U.S. highways in May fell a record 3.7 percent from last year. That braked a rally caused by an attack on two Royal Dutch Shell pipelines in Nigeria's Delta region. Shell said it halted some production but declined to say how much.

U.S. crude CLc1 was up 74 cents at $124 a barrel, off a high of $125.22. London Brent LCOc1 was up 63 cents at $125.15.

The gold market is biding its time as no major economic data will be available until second-quarter U.S. gross domestic product comes out on Thursday and a government payrolls report is released on Friday, said HSBC metals analyst James Steel.

Spot gold prices XAU fell 75 cents to $927.95 an ounce.

The euro EUR rose 0.27 percent at $1.5751.

The dollar fell against major currencies, with the U.S. Dollar Index .DXY down 0.25 percent at 72.635. Against the yen, the dollar JPY fell 0.47 percent at 107.34.

The euro shrugged off a report showing that German consumer sentiment hit a five-year low.

Asian stocks were mixed as financial sector uncertainty lingered ahead of a slew of company earnings.

Japan's Nikkei share average .N225 edged up 0.1 percent after U.S. economic data from Friday spurred hopes for the country's weakened export sector.

Outside Japan, shares in Asia-Pacific were down 0.2 percent, according to an MSCI index .MIAPJ0000PUS.