NEW YORK (MarketWatch) — U.S. stocks plunged Monday, extending last week’s smackdown, with Standard & Poor’s downgrade of U.S. credit exacting a heavy toll on already troubled investor sentiment.

The Dow Jones Industrial Average, which last week lost 698 points, nearly matched that drop in a single session, with Monday marking its worst day since late 2008.

“The downgrade of U.S. debt is clearly the catalyst for today’s move, but not the reason. The downgrade simply highlights [the fact that] the United States has problems which will take time to get resolved,” said Michael Sheldon, chief market strategist at RDM Financial.

The Dow Jones Industrial Average DJIA, +1.19% fell 634.76 points, or 5.6%, to 10,809.85, its first close under 11,000 since October. The daily point and percent loss is the worst for the blue-chip index since Dec. 1, 2008, when the Dow fell 680 points, or 7.7%.

All of the Dow’s 30 components slid, led by Bank of America Corp. BAC, +1.34% , down 20% as American International Group Inc. AIG, +0.87% was said to be suing the bank in a bid to recoup losses on mortgage-backed securities, the latest report highlighting how B. of A. is struggling with overhang from the 2007-2008 housing crisis. Read more about B. of A. and financials.

The Standard & Poor’s 500 Index SPX, +0.82% declined 79.92 points, or 6.7%, to 1,119.46, with financial stocks hardest hit among its 10 industry groups.

After Monday’s close, Standard & Poor's said its downgrade of U.S. debt would not impact the ratings of individual U.S. banks.

The technology-heavy Nasdaq Composite Index COMP, +0.74% lapsed 174.72 points, or 6.9%, to 2,357.69.

It was the worst day in percent terms for the Nasdaq and S&P 500 since Dec. 1, 2008.

For every stock that rose, 69 fell on the New York Stock Exchange, where more than 2.5 billion shares traded. Composite volume topped 9.7 billion.

Friday’s trading pattern looked as though investors were rotating into defensive sectors, while “today is more about moving to the sidelines and reassessing,” Sheldon added.

Bears push Dow down 635 points

Announced Friday night, the S&P decision followed an especially nasty week for equities, heightening the chances of “a very bad initial reaction,” wrote analysts at Barclays Capital in a Monday note.

Trying to reassure Wall Street and Main Street, President Barack Obama on Monday expressed hope that the downgrade would prompt “common sense and compromise” in Washington. President reiterates call for balanced approach to deficit reduction.

“No matter what some agency may say, we’ve always been and always will be a triple-A country,” the president said.

The U.S. dollar index DXY, -0.07% gained, and U.S. Treasury prices rallied, with yields on the benchmark 10-year note TMUBMUSD10Y, 0.686% down to 2.341%. Read more about Treasurys in Bond Report.

“This country has a debt problem, but it is manageable,” said Kevin Giddis, a fixed-income analyst at Morgan Keegan. “This country has a political-division problem, but it is fixable. This country has an economic problem, which can only be fixed with jobs, not government liquidity, and that is the one that worries me the most.”

Gold futures GC1Z rallied to close at a record $1,713.20 an ounce, and crude-oil futures CL1U dropped $5.57 to $81.31 a barrel on the New York Mercantile Exchange .Read more about gold topping $1.700 level.

The Federal Reserve meets Tuesday, but the central bank was not expected to make any dramatic moves.

“The Fed has to acknowledge the economic data has softened, but I’m not sure they’ll be ready to make any big changes,” said Sheldon at RDM Financial.