NEW YORK (Reuters) - Stocks fell on Wednesday as optimism receded about the Federal Reserve’s latest initiative to ease credit market strains, while a jump in oil prices to a record above $110 a barrel raised fears of further strains on corporate profits.

Financial shares dragged indexes lower a day after the market posted its best day in five years. Tuesday’s gains came in response to a coordinated effort by central banks to free up credit markets that have nearly ground to a halt in the wake of the U.S. housing meltdown.

Wednesday's session opened higher but the rally gradually lost steam over doubts about the long-term impact of the central bank actions. Bank of America BAC.N dropped 1.8 percent to $37.03, while Citigroup C.N fell 1.3 percent to $21.21. An S&P index of financial shares .GSPF lost 2.1 percent.

Oil hitting a record $110.20 a barrel didn't help matters, pulling down shares of transport companies and others sensitive to rising energy costs. The Dow Jones Transportation Average .DJT fell 1.6 percent.

The Dow industrials would have dropped further if not for a 3.6 percent gain to $75.25 by Caterpillar Inc CAT.N. The world's largest maker of construction and mining equipment raised its revenue forecast in anticipation of strong overseas spending on infrastructure.

But the main focus remained a plan led by the U.S. Federal Reserve to expand a lending program and accept as collateral a broader base of securities, including mortgage bonds whose value has dropped as the housing bubble burst.

“One bold move by the Fed doesn’t solve all the problems and all the issues,” said Georges Yared, chief investment officer at Yared Investment Research in Wayzata, Minnesota.

Slideshow ( 4 images )

“People are trying to assess how the Fed’s move will begin to benefit corporate earnings and move the banks along to start loaning money.”

The Dow Jones industrial average .DJI shed 46.57 points, or 0.38 percent, to 12,110.24. The Standard & Poor's 500 Index .SPX slipped 11.88 points, or 0.90 percent, to 1,308.77.

The Nasdaq Composite Index .IXIC dropped 11.89 points, or 0.53 percent, to 2,243.87.

In the broader market, the telecom and health-care sectors dragged. Shares of top U.S. phone company AT&T Corp T.N slid 2.1 percent to $35.32 on the New York Stock Exchange.

Shares of Humana HUM.N, one of the biggest Medicare plan providers, plummeted 13.7 percent to $40.88 after the company cut its first-quarter earnings forecast nearly by half.

Other health-care companies' shares also fell, with UnitedHealth Group Inc's UNH.N stock falling 4.1 percent to $36.68. Humana's lower outlook came a day after a gloomy forecast from rival WellPoint Inc WLP.N sent the entire health insurance industry reeling.

Slideshow ( 4 images )

On Tuesday, the Dow and Nasdaq rang up their biggest daily percentage gains since March 2003 after the Fed said it was expanding a lending program and will a broader range of securities, including mortgage bonds, as collateral.

But persistent concerns about the economy’s health cooled off the market’s earlier attempt to extend the rally into a second day.

Trading was moderate on the New York Stock Exchange, with about 1.56 billion shares changing hands, below last year’s estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.12 billion shares traded, slightly below last year’s daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by a ratio of about 5 to 3 on the NYSE and by 4 to 3 on Nasdaq.