Traders work on the floor at the New York Stock Exchange in New York, Monday, Aug. 3, 2009.  (AP Photo/Seth Wenig)

Traders work on the floor at the New York Stock Exchange in New York, Monday, Aug. 3, 2009. (AP Photo/Seth Wenig) (AP)

Stocks Fall as Financials Lower

Markets Dow Jones Newswires

U.S. stocks pared their declines in midday trading Wednesday as oil prices turned higher, but declines in the financial sector continued to weigh. 

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The Dow Jones Industrial Average dropped 97 points, or 0.6%, to 16335, after earlier declining as much as 266 points. The S&P 500 fell 0.6%, led by the financial sector, which dropped 1.4%. The Nasdaq Composite slipped 0.5%. 

Oil prices erased losses to trade higher after U.S. inventory data showed that crude-oil stockpiles rose to another record high last week but supplies of refined products like gasoline fell. U.S. crude oil gained 0.6% to $32.05 a barrel. 

"Oil is really the lightning rod for credit expansion in the U.S.," said Paul Moran at brokerage Aviate Global. "If oil goes lower, we'll will see higher impairments [for banks], which has a knock on effect on the price of credit," he said. 

Some investors have also used the oil price as a gauge of the health of the global economy, responding to downward moves by selling risky assets, such as stocks, across the board. 

Stocks climbed last week, recouping some of the year's steep losses. But the slump in bank shares and declining commodity prices have weighed on the rally this week. 

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The index's worst performer for the year, the financial sector has been hit by fears about the health of the U.S. economy and the prospect of interest rates staying lower for longer. 

Comments from J.P. Morgan Chase earlier this week about the risk of energy-company loan defaults also weighed. Bank of America shares have dropped nearly 30% so far this year, and shares of Citigroup have declined 29%. 

"Financials right now are really under the spotlight," said Kate Warne, investment strategist at Edward Jones. "The interest rate increases that were expected to help their earnings are less likely and the drop in oil prices is creating an additional risk of more bad loans," she added. 

Treasury prices gained as investors sought safety, pushing the yield on the 10-year Treasury note down to 1.671% from 1.740% on Tuesday. Gold, also considered a haven asset, rallied 2.1% to $1248.80 an ounce. 

Adding to investors' caution, Chinese authorities guided the yuan slightly weaker for a second day in a row. Depreciation of the currency sent shock waves through financial markets last August and at the start of this year. 

Investors fear a substantially weaker Chinese currency could spur capital outflows from the country and adversely impact China's trading partners. 

"China remains one of our biggest concerns in global financial markets," said Barclays economist Shengzu Wang. 

The Stoxx Europe 600 declined 2.4%. 

The Shanghai Composite Index closed up 0.9% as expectations built that Chinese authorities would soon announce a trial reform program for state-owned enterprises, but shares elsewhere in Asia fell, catching up with losses in the U.S. and Europe. 

Japan's Nikkei Stock Average slipped 0.9% as a stronger yen weighed on shares of exporters. Bank of Japan Governor Haruhiko Kuroda said the central bank wouldn't hesitate to act if market volatility were to threaten its efforts to defeat deflation, helping to push long-term Japanese government bond yields to record lows. Yields fall as prices rise. 

In currencies, the British pound hit a fresh seven-year low amid fears the U.K. could vote to exit the European Union in a June referendum. In a note published Wednesday, analysts at HSBC said a vote for such an exit would push the pound a further 15% to 20% lower against the dollar. 

The euro added 0.1% against the dollar to $1.0980. Recent weak manufacturing and business survey figures in Europe have also further fueled expectations the European Central Bank will expand its stimulus measures at its March meeting. 

Weak U.S. consumer confidence data on Tuesday did little to reassure investors about the strength of the U.S. economy. 

"The 10-year Treasury is literally telling you the bond market sees clouds on the horizon," said Bob Andres, chief investment officer of Andres Capital Management. 

Mr. Andres expects stocks to fall further amid a global slowdown, low commodities prices and after years of quantitative easing in the U.S., which he said artificially boosted stock prices. 

Tommy Stubbington, Chao Deng and Hiroyuki Kachi contributed to this article. 

Write to Riva Gold at riva.gold@wsj.com and Saumya Vaishampayan at saumya.vaishampayan@wsj.com