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Misgivings about Fed plan spark stocks sell-off

NEW YORK (Reuters) - Stocks fell on Thursday on concerns that the Federal Reserve’s latest efforts to stem the U.S. recession are too costly and untested, prompting investors to book profits on bank shares after the recent sharp rally.

Investors were unsettled by the implications of the Fed’s action to pump another $1 trillion into the financial system and a plan to expand its consumer and small business lending program, fearing the moves could stir up inflation in the long term.

Financials led the S&P lower, including JPMorgan JPM.N, down 8 percent at $24.95, as some investors opted to take their money off the table. The KBW Bank index .BKX, up 11 percent on Wednesday, slid 9.1 percent.

“Are they able to pull it off? Is it too aggressive in terms of leveraging the balance sheet?” asked David Katz, chief investment officer of Matrix Asset Advisors, in New York.

Diversified manufacturer 3M MMM.N was among the Dow's biggest drags, down 3.5 percent at $47.47, after brokerage Bernstein cut its price target on 3M's stock, saying the company will likely see its worst annual growth in nearly 40 years in 2009.

The Dow Jones industrial average .DJI fell 85.78 points, or 1.15 percent, to 7,400.80. The Standard & Poor's 500 Index .SPX lost 10.31 points, or 1.30 percent, to 784.04. The Nasdaq Composite Index .IXIC shed 7.74 points, or 0.52 percent, to 1,483.48.

On Wednesday, the Fed revealed its latest plan to stabilize the recession-hit economy, saying it will purchase longer-term government debt, which it has not done since the 1960s. The aim is to raise the supply of credit, pushing down longer-term rates on mortgages and other loans.

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Citigroup C.N tumbled 15.6 percent to $2.60 after it said it may conduct a reverse stock split as part of an exchange offer that could give the U.S. government a 36 percent stake in the bank.

The Nasdaq performed better than the other two main indexes with its declines offset by a rise in shares of Oracle Corp ORCL.O after the business software maker reported results that beat forecasts.

Oracle’s stock climbed 9.7 percent to $17.37.

A weaker dollar following the Fed’s action on Wednesday also helped boost commodity prices and lift shares in the energy and materials sectors, cushioning the market.

Shares of Chevron CVX.N added 0.8 percent to $67.13 as U.S. front-month crude settled up at $51.61 a barrel, up $3.47, or 7.2 percent.

In economic news, the number of U.S. workers drawing continuous state unemployment benefits hit a fresh record high early this month, according to government data that highlighted the difficulties of finding jobs in the recession-hit economy.

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Shares of package delivery giant FedEx Corp FDX.N rose 4.8 percent to $45.10 after the economic bellwether said it was taking market share despite a recession that has sharply dented its profits.

Since bouncing off fresh 12-year intraday lows in early March, the broad S&P 500 has gained 17.6 percent, but remains down more than 13 percent for the year.

Trading was active on the New York Stock Exchange, with about 1.95 billion shares changing hands, above last year’s estimated daily average of 1.49 billion, while on Nasdaq, about 2.35 billion shares traded, above last year’s daily average of 2.28 billion.

Declining stocks only slightly outnumbered advancing ones on the NYSE by 1,557 to 1,525, while on the Nasdaq, five stocks fell for every four that rose.

Editing by Jan Paschal

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