Stocks in the United States tumbled on Monday despite a proposed federal rescue plan for mortgage finance companies Fannie Mae and Freddie Mac.
The two companies have been put under Federal Reserve oversight and given a bigger line of credit.
Shares soared early on Monday as a result of Sunday's announcement by the US Treasury and the Federal Reserve that they would lend money and buy equity if needed to rescue the two companies.
But the gains soon fizzled because any direct government investment in Fannie Mae and Freddie Mac would further dilute existing shares.
Merrill Lynch warned that Fannie and Freddie will continue to incur rising losses from mortgage defaults for several years and may need to raise additional capital.
Fannie Mae and Freddie Mac own or guarantee $5 trillion in debt - almost half of the value of all US mortgages.
The Dow Jones industrial average fell 69.28 points, or 0.62%, to 11,031.26. Standard & Poor's 500 Index dropped 12.57 points, or 1.01%, to 1,226.92. The Nasdaq Composite Index shed 29.94 points, or 1.34%, to 2,209.14.
Shares of Fannie Mae, fell 4.9% to $US9.75 on the New York Stock Exchange, while those of Freddie Mac tumbled 10.7% to $US6.92. Both stocks had risen more than 20% in trade before the opening bell.
The market was also cautious because bank regulators stepped in late on Friday to prop up mortgage lender IndyMac Bancorp Inc.
IndyMac is the fifth US bank to fail this year. It will reopen on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision.
However, European shares rose on Monday.
The FTSEurofirst 300 index of top European shares was up 0.7% at 1,133.95 points.
In Frankfurt, the DAX index ended at 6200.25 points, up 46.95 or 0.76%. In Paris, the CAC-40 index closed at 4142.53 points, up 41.89 or 1.02%. In Zurich, the Swiss market index closed at 6675.26 points, up 36.37 or 0.55%.
In Britain, the FTSE 100 closed up 38.8 points, or 0.7%, at 5,300.4.
NZ market down
The New Zealand share market's NZX 50 index was down 41 points, or 1.3%, to 3080 on turnover of $87 million on Monday.
Telecom was down 6 cents to $3.33, Contact Energy was down 20c to $7.40 and Fletcher Building was down 13c to $6.25.
But Sky City Entertainment was up 2c to $3.02 after confirming it would make a profit of between $108 - $110 million.
After weaker retail figures, The Warehouse was down 10c to $3.90, Hallenstein Glasson was up 6c to $2.63 and Pumpkin Patch was down 1c to $1.43.
The Australian 200 Index fell 59 points to close at 4921.
In the currency markets: at 6.30am, the New Zealand dollar was trading at US76.43 cents, 78.61 Australian cents, 38.31 pence, 81.11 yen and 0.4803 euro. The Trade Weighted Index was at 67.61.