By Rodrigo Campos

Citigroup tumbled 20 percent as investors and analysts worried about whether the bank can be profitable and function effectively as it unravels its business model. It is expected to post a multibillion-dollar loss later this week.

Morgan Stanley analysts fueled fears about the health of the banking sector after it forecast HSBC is likely to halve its dividend and may need to raise up to $30 billion of capital.

Germany's Deutsche Bank also said it lost more than $6 billion last quarter.

"There is an awful lot of uncertainty out there about how severe the economic downturn will be and whether there will be a second round of asset write downs," said Lincoln Anderson, managing director and chief investment officer at LPL Financial in Boston.

The Dow Jones industrial average <.DJI> lost 269.76 points, or 3.19 percent, to 8,178.80. The Standard & Poor's 500 Index <.SPX> fell 31.03 points, or 3.56 percent, to 840.76. The Nasdaq Composite Index <.IXIC> dipped 51.92 points, or 3.36 percent, to 1,494.54.

Sales at U.S. retailers fell 2.7 percent in December, government data showed on Wednesday, as a deteriorating economic climate forced consumers to cut back on spending during the key holiday period.

Consumer spending accounts for about two-thirds of U.S. economic activity and as such is a key pillar of corporate profits. The S&P retail index <.RLX> declined 3.3 percent.

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

"There is a lot of concern over the Treasury Secretary nomination right now, and whether that is going to impact the financial rescue program," Anderson added.

The fall in Citigroup, a Dow component, followed a deal by the embattled bank to sell a controlling stake in its crown jewel unit, the Smith Barney retail brokerage, to Morgan Stanley for $2.7 billion.

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

Investors also sold off shares of economic bellwethers including big manufacturer Caterpillar Inc , down 4.7 percent. On Nasdaq, shares of iPhone maker Apple Inc led the slide, falling 2.1 percent to $85.88.

JPMorgan is due to post quarterly results on Thursday after it moved up its reporting date, followed by Citigroup on Friday after it also moved up its results date.

On Tuesday, Federal Reserve Chairman Ben Bernanke said more steps were needed to stabilize banks, reviving the idea of authorities sopping up toxic assets from banks' books.