NEW YORK, Nov. 2, 2007 -- The financial sector dragged down the stock market on Thursday, wiping out the previous session's Fed-fueled gains, after brokerages downgraded the two largest U.S. banks, renewing fears of more fallout from the credit crisis.

Adding to pressure, Dow component Exxon Mobil (NYSE:XOM - News) reported earnings that fell short of Wall Street's expectations.

A CIBC World Markets downgraded Citigroup to "sector underperformer," citing capital concerns. CIBC analyst Meredith Whitney, who cut her 2008 and 2009 earnings estimates for the bank, said she believes Citi will be forced to sell assets, raise capital or cut its dividend to shore up its capital ratios.

Stocks surrendered all the gains they notched up late Wednesday afternoon after the U.S. central bank cut the benchmark fed funds rate a quarter percentage point to 4.5 percent. But the Federal Reserve suggested further rate reductions were far from a sure bet.

"It's ugly out there, very ugly," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia. "The bank downgrades set the tone, along with the takeaway from the Fed, which is that there is no guarantee there is another cut coming.

"The financials are facing a lot of headwinds. The subprime issue just doesn't get fixed in a couple of months," he added.

The Dow Jones industrial average (DJI:^DJI - News) was down 191.68 points, or 1.38 percent, at 13,738.33, off its session low at 13,667.61. The Standard & Poor's 500 Index (^SPX - News) was down 21.41 points, or 1.38 percent, at 1,527.97. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was down 32.52 points, or 1.14 percent, at 2,826.60.

The S&P financial index (^GSPF - News) fell 3.6 percent, its biggest drop since August 9, when the credit crisis made headlines in Europe and rattled global markets.

CIBC also downgraded Bank of America (NYSE:BAC - News), the second-largest U.S. bank, saying it sees a diminished revenue outlook for the bank. In addition, Credit Suisse cut its rating on Citigroup.

Citigroup shares dropped 6.7 percent to $38.60, a 4-1/2-year low, while Bank of America shares shed 3.5 percent to $46.61.

Adding to the gloom in the financial sector, Credit Suisse said its third-quarter investment banking profit was all but wiped out by write-downs in leveraged loan commitments, residential mortgages and collateralized debt obligations.

Exxon shares slid 2.1 percent to $90.07 on the NYSE.

Shares of Crocs (NasdaqGS:CROX - News) plunged 29.5 percent to $52.69 and topped the list of the Nasdaq's biggest percentage losers after the plastic shoe maker's profit outlook trailed Wall Street forecasts.

In economic news, an Institute for Supply Management report showed manufacturing growth deteriorated last month to its slowest pace since March on tightened credit conditions and the housing downturn.

(Source: Reuters)