Wall Street falls on banks and earnings anxiety

NEW YORK (Reuters) - Stocks fell on Tuesday as investors fretted over gloomy earnings and the health of the banking sector that underlined the depth of the difficulties facing President-elect Barack Obama.

Banks led the way down after State Street Corp posted a hefty unrealized loss on its investment portfolio, fueling worries of more losses to come for the sector that has been at the epicenter of the credit crunch and resulting economic slowdown that has spread around the world. State Street's shares plunged more than 50 percent.

The negative tone for the sector had been set in Britain by Royal Bank of Scotland , which reported the biggest loss in British corporate history on Monday, when U.S. markets were closed for the Martin Luther King holiday.

The RBS loss "just goes to underscore that the financial sector globally is under a lot of pressure and creating a lot of sovereign problems," said Gail Dudack, Chief Investment Strategist at Dudack Research Group in New York.

"There's always hope that the worst is beyond us and every quarter seems to say maybe not yet."

The Dow Jones industrial average <.DJI> fell 137.07 points, or 1.66 percent, to 8,144.15. The Standard & Poor's 500 Index <.SPX> lost 20.78 points, or 2.44 percent, to 829.34. The Nasdaq Composite Index <.IXIC> gave up 41.62 points, or 2.72 percent, at 1,487.71.

Optimism over a plan by Obama, who will be sworn in later on Tuesday, to push for a fresh stimulus package to stave off a worsening economy could help cushion the market, though analysts noted some of that optimism has been priced in.

Shares of State Street Corp plummeted 50.5 percent to $17.98 after the financial services company said quarterly earnings slid and unrealized losses rose in its commercial paper program and investment portfolio.

Among major U.S. banks, Citigroup shed 11.1 percent to $3.11, while Bank of America lost 15.7 percent to $6.05.

Dow component Johnson & Johnson was the latest company to issue a disappointing 2009 earnings forecast, but it posted higher quarterly earnings as cost cuts offset weak sales. Its shares were down 0.8 percent at $57.01.

Energy companies fell alongside the price of oil after a deal between Russia and Ukraine cleared the way for the resumption of gas supplies to Europe. Shares of Chevron fell 2.2 percent to $70.19.

(Editing by Chizu Nomiyama)

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