Just a few weeks ago, many investors were hoping that the worst might be over for financial stocks and that the industry's poor third-quarter earnings performance represented a 'kitchen sink' quarter that could pave the way for better times.

Not anymore.

Shares of financial stocks fell sharply yesterday amid widespread concern the months-long credit crunch will persist and that rising levels of bad commercial and residential loans may soon spill over into other consumer businesses, such as credit cards and auto loans. Those views largely overshadowed Wednesday's move by the Federal Reserve to cut interest rates by a quarter-point -- an action that typically boosts financial stocks. Instead, investors are now fretting the Fed might not be able to cut interest rates many more times, because inflation remains a concern.

Those fears led to a steep selloff in the financial sector, hitting big banks particularly hard and sending some to 52-week lows. Citigroup Inc., which has been under pressure for months, saw its share price tumble nearly 7% after CIBC World Markets Inc. analyst Meredith Whitney speculated the big bank will need to raise more than $30 billion to restore its capital cushion and raised the possibility of a dividend cut. A person familiar with the matter said there aren't any plans to cut the quarterly payout. A Citigroup spokeswoman declined to comment.

Shares of Bank of America Corp. fell about 5%, and J.P. Morgan Chase & Co. fell nearly 6%.

The Dow Jones Wilshire U.S. Banks Index is down nearly 20% this year, compared with a 6.4% rise in the Standard & Poor's 500-stock index.

The rout also walloped the likes of mortgage insurer Ambac Financial Group Inc, which dropped nearly 20%, and its competitor, MBIA Inc., which fell more than 11%. In recent years, these companies got into the business of insuring slices of collateralized debt obligations, or pools of debt. Now, worries are growing that they will face losses, raising questions about the value of the insurance that has been purchased.

Even long-term bulls are finding it hard to do much buying.

'If you look out a couple of quarters, it's hard to be particularly bullish about financials,' says Jeff Arricale, who runs a financial-stock mutual fund for T. Rowe Price Group Inc.

Although the nation's biggest banks have underperformed the broader market this year, Wall Street analysts are skeptical that the stocks have touched bottom. In recent days, two prominent Wall Street analysts have slashed their ratings on the nation's biggest banks to 'sell' from 'buy' -- bypassing the traditional and more neutral 'hold' rating.

Other analysts recently singled out Citigroup for downgrades. The nation's biggest bank, as measured by assets, is struggling in businesses from capital markets to consumer banking. It has been under enormous pressure for months, and the credit crunch has only heightened that pressure. A number of senior traders have left the firm in recent weeks, and Chief Executive Charles Prince has shaken up management ranks in the core investment-bank operations.

Still, 'it is too early to have a [buy] position in the banks because the stocks are likely to continue to underperform over the next several quarters,' said David Hilder, a bank analyst at Bear Stearns Cos. who noted that nonperforming loans more than doubled at big banks in the third quarter. His decision to slash the industry rating to 'sell' from 'buy' represented the first time in six years that Mr. Hilder has placed a 'sell' recommendation on the group.

Banks already have taken billions of dollars in write-downs from trading losses tied to the credit crunch. The situation has created a massive ripple effect on Wall Street, contributing to the departure of top traders, industry veterans and Merrill Lynch & Co. CEO Stan O'Neal.

Investors and analysts fear that more write-downs will be coming in the fourth quarter, particularly if frozen debt markets don't thaw soon. Citigroup, J.P. Morgan and Bank of America are seeking to pump liquidity into commercial-paper markets by forming a megafund that will buy assets from certain off-balance-sheet structured investment vehicles.

In slashing her industry rating to a 'sell,' Morgan Stanley analyst Betsy Graseck said the liquidity crunch in credit markets is spilling over to consumer lending as banks seek to conserve capital. 'They are pulling back from the consumer,' Ms. Graseck said.

Still, that didn't spook Lee Norton, an analyst at JS Asset Management LLC in West Conshohocken, Pa., who was buying shares of Citigroup and Wachovia Corp. 'Valuations are near all-time lows for some of these stocks, and though fundamentals are clearly deteriorating, I think they are built into the market,' he said.

Another reason that many investors aren't bottom picking is that many remain unconvinced that the book value, or assets after liabilities, of financial companies is accurately reflected by their financial statements. As well-followed indexes that track subprime debt, such as the ABX, continue to have problems, some of the debt investments on the books of banks may have to be written down, some traders say.

'These companies don't own factories, they don't own hard assets, it's a confidence game,' said the head of private-equity firm who has examined a purchase of financial companies. 'If you don't believe the numbers, it's hard for us and others to get involved. All you need is a little change in their reserves and you wipe out equity.'

Robin Sidel / Gregory Zuckerman