Stocks slip as bailout doubts spark bond gains

By Herbert Lash

NEW YORK (Reuters) - Uncertainty over the fate of a proposed $700 billion bailout of Wall Street drove down U.S. and European stocks on Tuesday, while the dollar rose on views the plan might not be as negative for the greenback as initially feared.

U.S. and euro-zone government bond prices rose and inter-bank lending rates traded far above central bank target levels as investors worried about the viability of a plan whose final cost and composition are still unknown.

Oil prices fell more than $2 a barrel, reversing Monday's dramatic rally, as dealers focused on slowing global energy demand and doubts over the U.S. bailout plan. Other commodities also tumbled, with copper down 3.2 percent in New York, with profit-taking on the firmer dollar adding pressure.

Credit markets remained tight as U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke testified before Congress. A closely watched gauge showed banks are still reluctant to make loans to each other.

Paulson urged lawmakers to pass legislation quickly to calm markets, but congressional leaders said it would be a mistake to rush such a sweeping bailout into law.

No senator stepped forward with an overt threat to block the plan, but the head of the Senate Banking Committee, Connecticut Democrat Christopher Dodd, said the plan was "not acceptable," although he said Congress could pass a plan if changes are made.

"I just don't think the American public is sold. I think they are skeptical of the need and they are fearful of the cost," David Dietze, chief investment officer at Point View Financial Services in Summit, New Jersey.

"The skepticism is that this is going to help the Wall Street financiers and do nothing for the little guy other than saddle them with a big tax bill," Dietze said.

U.S. stocks fell in a day of sharp volatility, on fears that Congressional wrangling could delay the proposed rescue plan, increasing worries about the struggling U.S. economy.

Lower commodity prices dragged down oil and energy-related companies.

The Dow Jones industrial average .DJI closed down 161.52 points, or 1.47 percent, at 10,854.17. The Standard & Poor's 500 Index .SPX shed 18.89 points, or 1.56 percent, at 1,188.20. The Nasdaq Composite Index .IXIC slipped 25.64 points, or 1.18 percent, at 2,153.34.

General Electric Co (GE.N) was a top drag on the Dow and the S&P, falling 4.6 percent to $24.95, after a Goldman Sachs analyst cut the company's profit outlook and on concerns of the conglomerate's GE Capital finance business.

European shares ended sharply lower for the second straight as investors fretted over the bailout.

The pan-European FTSEurofirst 300 .FTEU3 index closed 1.64 percent lower at 1,108.54 points.

Banks took the most points off the index, with UBS (UBSN.VX) falling 7.9 percent, and miners also fell sharply, tracking a fall in metal prices. Anglo American (AAL.L) was the most heavily weighted loser on the index, down 8.2 percent.