Wall Street drops on Obama bank limits plan

US stocks suffered their worst one-day percentage drop since October on Thursday as US president Barack Obama proposed tough restrictions on banks that would squeeze profits.

Major banks slid, with Goldman Sachs falling 4.1% despite posting stronger-than-expected fourth-quarter results, and JPMorgan Chase & Co shed 6.6%, after Obama proposed limiting how banks invest their own money.

"It looks as though banks may be going down the path of being regulated like utilities," said Tom Sowanick, chief investment officer at The Omnivest Group in Princeton, New Jersey.

Obama said banks should no longer be allowed to own, sponsor or invest in hedge funds for proprietary profit.. Proprietary trading — when a firm uses its own money to make bets on markets — has been an engine of earnings for some major banks.                 

The proposals must receive congressional approval.

The Dow Jones industrial average fell 213.27 points, or 2.01%, to end at 10,389.88. The Standard & Poor's 500 Index was down 21.56 points, or 1.89%, at 1,116.48. The Nasdaq Composite Index was down 25.55 points, or 1.12%, at 2,265.70.

The Dow had its worst two-day percentage decline since June, while the Dow and S&P 500 had their worst one-day percentage losses since late October.

It was the second straight day of steep losses for stocks, with the market falling from 15-month highs on Wednesday on worries over China's curbs on bank lending.

After the market's close, shares of Google Inc fell 4.8% to $555 after the company reported quarterly results. In regular trading Google rose to $582.98 on the Nasdaq.

American Express Co also declined after reporting results, slipping 1.7% to $41.44 in after-hours trading.

In other markets, the dollar fell and bonds rose in a flight to safety as the stock market tumbled on Obama's announcement. 

Shares of Goldman Sachs closed down at $160.87, while JPMorgan Chase ended down at $40.54.

Morgan Stanley fell 4.2% to $29.34, while Citigroup fell 5.5% to $3.27 and Bank of America dropped 6.2% to $15.47.

The Select Sector SPDR Financial ETF was down 2.7%.

Also contributing to Wall Street's slide were major energy companies whose shares fell as oil prices dropped 2% to $75.92 a barrel.

Exxon Mobil shares were down 2% at $66.70. Chevron Corp fell 2.4% to $76.24.

The CBOE Volatility index, sometimes called Wall Street's fear gauge, jumped after the proposed restrictions on US banks.

The VIX rose 19.2% and had its biggest two-day percentage increase in 14 months.

Volume on the New York Stock Exchange was 1.5 billion shares, about equal with last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 2.89 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 4 to 1, while declining stocks beat advancers on the Nasdaq by about 10 to 3.