US STOCKS-Wall St slips on rethink of Fed plan, oil over $110

(Updates to close)

By Justin Grant

NEW YORK, March 12 (Reuters) - U.S. stocks fell on Wednesday as optimism receded about the Federal Reserve's latest initiative to ease credit market strains, while a jump in oil prices to a record above $110 a barrel raised fears of further strains on corporate profits.

Financial shares dragged indexes lower a day after the market posted its best day in five years. Tuesday's gains came in response to a coordinated effort by central banks to free up credit markets that have nearly ground to a halt in the wake of the U.S. housing meltdown.

Wednesday's session opened higher but the rally gradually lost steam over doubts about the long-term impact of the central bank actions. Bank of America (BAC.N: Quote, Profile, Research) dropped 1.8 percent to $37.03, while Citigroup (C.N: Quote, Profile, Research) fell 1.3 percent to $21.21. An S&P index of financial shares lost 2.1 percent.

Oil hitting a record $110.20 a barrel didn't help matters, pulling down shares of transport companies and others sensitive to rising energy costs. The Dow Jones Transportation Average .DJT fell 1.6 percent.

The Dow industrials would have dropped further if not for a 3.6 percent gain to $75.25 by Caterpillar Inc (CAT.N: Quote, Profile, Research). The world's largest maker of construction and mining equipment raised its revenue forecast in anticipation of strong overseas spending on infrastructure.

But the main focus remained a plan led by the U.S. Federal Reserve to expand a lending program and accept as collateral a broader base of securities, including mortgage bonds whose value has dropped as the housing bubble burst.

"One bold move by the Fed doesn't solve all the problems and all the issues," said Georges Yared, chief investment officer at Yared Investment Research in Wayzata, Minnesota.