By Leah Schnurr

Citigroup tumbled more than 23 percent as investors and analysts worried whether the bank can be profitable and function effectively as it unravels its business model. It is expected to post a multibillion-dollar loss this week.

Fears about the banking sector were fueled after Morgan Stanley analysts forecast HSBC , Europe's biggest bank, is likely to halve its dividend and may need to raise up to $30 billion of capital, while Germany's Deutsche Bank said it lost more than $6 billion last quarter.

Government data suggested the recession was deepening. Sales at U.S. retailers fell 2.7 percent in December as the economic slowdown made consumers cut back on spending during retailers' crucial holiday selling period.

"With this continued weakness we see on the part of the consumer, continued layoffs and companies cutting back spending, it really is in the early part of this year painting a bleak picture for the economy as a whole," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

The Dow Jones industrial average <.DJI> fell 199.83 points, or 2.37 percent, to 8,248.73. The Standard & Poor's 500 Index <.SPX> gave up 23.32 points, or 2.67 percent, at 848.47. The Nasdaq Composite Index <.IXIC> lost 41.91 points, or 2.71 percent, to 1,504.55.

The day's declines put another wrench in the market's attempt to recover from its November bear market low. The broad S&P 500 had gained more than 20 percent from that level, but is now up about 14 percent.

The S&P financial index <.GSPF> was down 5.5 percent. Since the start of the year, the index has managed only two up days. Dow component Citigroup was down 23.4 percent at $4.52 after a deal by the embattled bank to sell a controlling stake in its crown jewel, the Smith Barney retail brokerage unit, to Morgan Stanley for $2.7 billion.

Analysts speculate the Smith Barney sale is a precursor to a break-up of Citigroup and that the bank must be urgently seeking to replenish capital due to mounting losses.

JPMorgan is due to post results on Thursday after moving up its reporting date, followed by Citigroup Friday after it too moved up its date. JPMorgan fell 2.1 percent to $25.80.

The S&P retail index <.RLX> fell 3 percent on worries cash-strapped consumers spooked by the recession are not in a mood to buy. Consumer spending accounts for about two-thirds of U.S. economic activity, making it a key pillar of corporate profits.

The Federal Reserve's anecdotal Beige Book report on the economy added to the sour picture, showing the economy weakened further in the opening days of the new year.

Tax and domestic help troubles surrounding Treasury Secretary-nominee Timothy Geithner added to investor worries, but President-elect Barack Obama said he expects Geithner to be confirmed. If this happens, Geithner will be Obama's point man on efforts to combat the financial crisis.

Energy shares also tumbled, taking oil's lead as U.S. crude fell nearly 1.4 percent on rising inventories and weakening demand from the United States. Exxon Mobil and Chevron were among the Dow's biggest drags, falling 2.3 percent to $76.12 and 2.2 percent to $70.21, respectively.

(Editing by James Dalgleish)