Stocks closed down sharply in the second-worst daily decline of the year as the woes in the subprime mortgage market continued to rattle the major markets, particularly financial stocks.
"I don't this is over," said Patrick Fay, director of equity trading at DA Davidson, in an interview with CNBC.com.
Fay said he "absolutely" expects further selling later this week. "The market has been overdone for a while and it needs a correction."
"Investors are still very, very concerned obviously," Hugh Johnson, chief investment officer at Johnson Illington Advisors, told CNBC. "There are deep concerns about a possible credit crunch and the impact that would have on the economy; there are a lot of negative feelings out there today."
Carter Worth, chief technical strategist at Oppenheimer, told CNBC.com the rally off the market's lows in late February is likely over.
"The next move for equities is down," he said. "HSBC announced long before New Century Financial that the subprime industry was going to be weak. That was five weeks ago and (the market) has been down ever since."
Financial stocks, homebuilders and REITs were the targets of intense selling. The financial sector was the biggest loser among the the ten S&P 500 sectors, which were all trading in negative territory.
Brian Gendreau, investment strategist with ING Investment Management, told CNBC that a noon report showing a jump in delinquency rates for subprime mortgages spooked investors.
"A lot of these concerns may be overblown," said Gendreau. "The economy is fairly strong and the labor markets have been really strong."
"Six weeks ago nobody knew what subprime meant, now it's the buzz everybody's talking about," Randy Bateman, chief investment officer at Huntington Funds, told CNBC.com. "I don't necessarily think this will have a ripple effect outside the subprime area, but it is something that is causing the market concern."
But some investors remained upbeat despite Tuesday's market decline.
"We've got stability coming back into the global markets," said Arthur Hogan, managing director at Jefferies. "We're not waking up and seeing multiple percentage point gains or losses across the board in Asia, Europe or here. We're shifting our focus back to fundamentals and we're less concerned about momentum and psychology."
The New York Stock Exchange suspended trading of New Century Financial [NEW Loading... (%) ] and said it would delist the stock. New Century appears to be on the brink of bankruptcy as the company said its lending activities are under investigation by the U.S. Securities and Exchange Commission and said it has received a subpoena for certain documents from the state of California.
Shares of mortgage bank Accredited Home Lenders [LEND Loading... (%) ] plunged wider than 60% on liquidity concerns. The company said Tuesday $190 million in margin calls from its lenders has depleted cash reserves. Bear Stearns downgraded the stock on Tuesday to "peer perform" from "outperform" but said a sale of the company remains a possibility.
Goldman Sachs [GS Loading... (%) ] was a bright spot after it reported diluted earnings per common share of $6.67, beating expectations. Analysts surveyed by Thomson Financial were predicting profits would drop slightly to $4.90 a share from $5.08 a share in the year-ago period. Shares opened up but turned lower in afternoon trading, however, mirroring a drop in the overall markets.
Citigroup [C Loading... (%) ] raised its offer for Nikko Cordial, Japan's third-biggest securities firm, by 26% to $13.4 billion on Tuesday. Citigroup announced it would pay 1,700 yen a share for Nikko, up from last week’s offer of 1,350 yen.
Qualcomm boosted its second-quarter earnings and sales guidance, citing stronger-than-expected worldwide demand for products based on its CDMA mobile phone technology. Qualcomm shares rose while shares or rival Texas Instruments [TXN Loading... (%) ] fell after the company issued in-line earnings and sales guidance for the first quarter.
Billionaire investor Carl Icahn said his affiliated entities will initiate a tender offer for WCI Communities [WCI Loading... (%) ] at $22 a share.
New York light crude futures [US@CL.1 Loading... (%) ] closed down 1.7%, falling for the fourth straight session. Crude is down 5.1% year to date.
On Tuesday morning, the Commerce Department said retail sales in February rose 0.1%, less than expected. Economists surveyed by Dow Jones Newswires and CNBC expected a 0.3% increase in overall retail sales for February, compared with no change the month before.
The dollar fell against the yen while treasury prices rose following the retail sales data, sending yields lower.
European Shares Slip, Asian Markets Close Mostly Lower
London's FTSE-100, [FTIND Loading... (%) ] the Frankfurt DAX [DAX-XE Loading... (%) ]and the Paris CAC-40 [CAC40-FR Loading... (%) ] all closed in the red.
In London, music and book group HMV issued a profit warning as it announced the outcome of a strategic review to better cope with tough competition from supermarkets and the Internet.
Tokyo's Nikkei 225 Average [NIKKEI Loading... (%) ] snapped a three-day winning streak to finish weaker in quiet trade as exporters such as Sony [SNE Loading... (%) ] lost ground on continued concern about the outlook for the key U.S. market.
South Korea's Kospi Index ended down as Korea Exchange Bank fell on worries regulators would review its approval of the lender's sale to U.S. fund Lone Star, but power provider KEPCO gained after oil prices fell.
Hong Kong stocks were lower, pacing soft Asian markets, but property stocks outperformed ahead of a land auction later in the day. The Shanghai Composite Index bucked the trend and edged higher, adding to five straight days of gains, but many financials were soft and traders expect substantial profit-taking around the 3,000 level.
© 2007 CNBC.com
New York Stock Exchange. 
Just two weeks after China sent global markets into a tumble, growing worries about sub-prime mortgage lenders in the United States are sending jitters through stock exchanges around the globe. The three major US stock market indices each fell two percent from Monday's closing price, marking the second-biggest loss of 2007. London's FTSE 100, Paris' CAC 40 and Frankfurt's DAX 30 indices each closed down more than 1 percent.

As the Mortgage Bankers Association reported that late payments on mortgages and home foreclosures in the US homes rose in the fourth quarter to their highest level in years, investors are concerned that not only US banks but also multi-national banks around the globe could have exposure.

More than two dozen sub-prime lenders have closed or sold operations as defaults on those mortgages have risen. "The delinquencies and defaults have started to soar," said Nicolas Retsinas, director of Housing Studies at Harvard University. "A lot of these lenders started to make loans and lost track of some of the fundamentals." 

New Century Financial Corporation, the second largest sub-prime lender in the US, has recently revealed that its creditors were no longer providing funds and, further, it has become subject of an SEC investigation. The New York Stock Exchange has said it will delist New Century. Accredited Home Loan Lending, another major sub-prime mortgage specialist, said it was seeking fresh capital and waivers on its lending covenants.

Sub-prime lenders provide mortgages to people who do not qualify for loans from mainstream lenders, typically due to their credit histories. The lenders then bundle these mortgages as collateral for loans that they obtain from other financing firms, such as GMAC. Such firms can then repackage these loans and sell them as mortgage-backed securities. These securities may end up in the hands of major multi-national banks such as Citibank, HSBC, and Commerzbank. Each level of lending assumes a level of financial risk, but trouble can arise when the risk tolerances are exceeded. If too many homeowners default on their mortgages, the sub-prime lender can end up defaulting. If too many of these lenders default, as it is feared may be happening now, the defaults can cascade upward. While no one is predicting major bank failures at this point, it is feared that their profits could be hurt.