NEW YORK (MarketWatch) -- U.S. stocks on Tuesday staged a broad retreat, pushed down by a drop in the price of crude oil, which fed worries of a global economic slowdown, and intensifying concern about Lehman Bros. Holdings Inc.'s ability to raise capital.

"Investors are getting defensive, bracing for further economic erosion," said Jack Ablin, Chief Investment Officer, Harris Private Bank.

Rekindling concerns about the impact of the credit crisis, shares of Lehman Brothers Holdings Inc. LEH, plunged 44.6% after hopes of a capital injection from Korea Development Bank were dashed. See more.

After chalking up its largest one-day gain in a month, the Dow Jones Industrial Average DJIA, -0.47% nearly wiped out the prior day's gains, dropping 280.01 points, or 2.4%, to end at 11,230.73, with 24 of its 30 components finishing in the red.

Financials weighed heavily on the blue-chip barometer, with American International Group Inc. AIG, -1.23% off 19.3% and American Express Co. AXP, -1.08% falling 5.6%.

Also, Procter & Gamble Co. PG, -0.54% slipped after a downgrade of the consumer-products giant by Merrill Lynch to neutral from outperform.

But shares of fellow blue chip McDonald's Corp. MCD, -0.71% climbed 1.2%. The fast-food giant said same-store sales during August increased by 4.5% in the U.S. and by 8.5% globally.

The S&P 500 SPX, -0.48% fell 43.28 points, or 3.4%, to 1,224.51, while the Nasdaq Composite COMP, -0.29% declined 59.95 points, or 2.6%, to finish at 2,209.81.

Energy and financials gave up the most ground among the S&P's 10 industry groups, with the former off 8.3 % and the latter down 6.1%.

Volume on the New York Stock Exchange neared 1.7 billion, with declining stocks outpacing those advancing more than 7 to 1. On the Nasdaq, more than 1 billion shares changed hands as decliners topped advancers more than 4 to 1.

On Monday, U.S. stocks rallied sharply on the government's plan to acquire most of Fannie Mae FNM, and Freddie Mac FRE, -0.64% .

Capital needs

The bailout of Fannie Mae and Freddie Mac is "a step, but it's not the answer to all our prayers. It helps position us for the future but doesn't solve our current troubles," said Ablin.

"It was a relief rally yesterday on a measure that the government had to take. Without it, things would have been a lot worse, but it doesn't save the financial sector from the inevitable, which is higher credit losses," said Noman Ali, a portfolio manager with MFC Global Investment Management.

"We won't see any sustained move until we see resolution of core reasons. The financial sector is still tight on credit, and will need to raise capital," said Ali.

Stock indexes churned around earlier in the session, after the National Association of Realtors reports its index of pending home sales fell 3.2% in July from the prior month. Read Economic Report.

The NAR's index is helpful to look at the state of the housing market, but it's "skewed by the huge amount of foreclosures," said Peter Boockvar, equity strategist at Miller Tabak.

"We're still a ways away (to a bottom), but foreclosures help to get to that end sooner rather than later," the analyst said.

Separately, the government said U.S. wholesale sales fell 0.3% in July after a 3% climb in June.

And in its summer update, the Congressional Budget Office said the federal budget outlook has deteriorated in the face of a weakening economy and as war spending rises, with the U.S. deficit likely to double this year compared to last. See detailed report.

Credit Suisse downgraded four U.S. homebuilders -- Toll Brothers Inc. TOL, -4.51% , Pulte Homes Inc. PHM, -1.07% , D.R. Horton Inc. DHI, -0.63% and KB Home KBH, -2.45% -- to neutral from outperform.

Crude-oil futures dropped nearly 3% to close at their lowest level since April, with crude for October delivery off $3.08, or 2.9%, to close at $103.26 a barrel on the New York Mercantile Exchange.. Read Futures Movers.

Overseas, Asia stocks fell, with the Nikkei 225 slipping 1.8% in Tokyo. See Asian Markets. Europe stocks failed to hold early gains, with the pan-European Dow Jones Stoxx 600 index finishing 0.6% lower. Read Europe Markets.