NEW YORK Stocks fell on Tuesday on fear that congressional wrangling could delay a proposed $700 billion plan to rescue the financial sector, increasing worries about the struggling U.S. economy.
But index futures surged in extended trading after Warren Buffett's Berkshire Hathaway surprised investors with a $5 billion investment in Goldman Sachs Group (GS.N).
Goldman Sachs shares shot up 8.4 percent after the news, while futures pointed to a sharply higher open on Wednesday. Shares of other banks also jumped. Morgan Stanley was up 9.5 percent in electronic trade.
"It's clearly a positive when Warren Buffett sees value in a company," said Richard Sichel, chief investment officer of Philadelphia Trust Co.
"Buffett is so highly regarded as an intelligent value investor, if he's putting a lot of money into a company that's been beaten down, it sends a message to the market that maybe not every financial company should be ignored at this point."
In the regular session, General Electric (GE.N) was the biggest drag on the S&P 500, falling more than 4 percent, after Goldman Sachs cut the company's profit outlook. GE also weighed on the Dow.
Downgrades also hurt the shares of Bank of America (BAC.N), off 2.5 percent, while energy company shares weakened with the price of oil.
The main focus, though, was on the government's rescue plan, which involves mopping up bad mortgage debt from bank balance sheets in an effort to get them lending again.
Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress to approve the plan quickly, warning that a delay would put the economy at risk. But lawmakers pushed back, saying it still lacked detail.
"Everybody's waiting for this plan to be detailed, and the longer it's delayed, the more people speculate that maybe it won't happen. The one thing the market hates is uncertainty," said Edward Craig, head of cash equities trading at Jefferies Group in New York.
The Dow Jones industrial average .DJI fell 161.52 points, or 1.47 percent, to end at 10,854.17. The Standard & Poor's 500 Index .SPX slid 18.87 points, or 1.56 percent, to 1,188.22. The Nasdaq Composite Index .IXIC dropped 25.64 points, or 1.18 percent, to 2,153.34.
Bernanke told the Senate Banking Committee that "action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy."
Earlier, technology shares led the market higher on hopes that the government's rescue plan would loosen up lending and boost spending.
But doubts about the bailout plan took center stage by late afternoon. Some traders said that even a swift passage of the bill would not lead to the end of the credit crisis or necessarily bolster the slumping U.S. housing market.
"The big question is, 'Will the banks lend if they get their balance sheets cleaned up?'" said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "We need that money to start flowing again, but if the unemployment rate is going up, banks might be a little hesitant. So in the short run, the path of least resistance for stocks is down."
A drop in global commodity prices hurt shares of natural resources companies, including aluminum producer Alcoa (AA.N),
down 4.5 percent at $25.59, and Exxon Mobil (XOM.N), off 1.5 percent at $77.69.
Bank of America shares shed 2.5 percent, or 85 cents, to $33.30. The stock fell after Oppenheimer & Co. bank analyst Meredith Whitney cut her profit outlook on the No. 2 U.S. bank and forecast more dividend cuts for banks in general, saying the government's bailout plan had little hope of improving core fundamentals over the near and medium term.
General Electric fell 4.6 percent to $24.95 after an analyst at Goldman Sachs cut the profit outlook on the diversified manufacturer.
After leading an earlier rally, technology shares turned negative, with iPod maker Apple Inc (AAPL.O) shedding 3.2 percent to $126.84. Economic bellwether Microsoft (MSFT.O) ended up just 0.2 percent, or 4 cents, at $25.44.
Technology shares are considered among the better placed to gain if the government's bailout plan is passed, analysts said.
"If they can free up lending as a result of this package, I think that will spur business. If you want to capitalize on a recovery in the fourth quarter, you're going to go into growth stocks and that's in tech," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
About 1.15 billion shares changed hands on the New York Stock Exchange, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.03 billion shares traded, also below last year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones on the NYSE by about 2.6 to 1. On the Nasdaq, decliners beat advancers by a ratio of about 2 to 1.
(Additional reporting by Chris Sanders, Ciara Linnane and Ellis Mnyandu; Editing by Jan Paschal)