Car Companies Drag Down Economy

Optimism may have buoyed stock markets for much of March, but on Monday, fear took a turn in the driver’s seat.

Worries about the financial system and the possibility of a bankruptcy filing at General Motors hung over investors across the world on Monday. The major indexes on Wall Street tumbled, and stocks fell across Europe and Asia on a major shake-up in the auto industry and fears about the outcome of the Group of 20 meeting this week.

The major indexes in New York nose-dived at the opening and headed lower throughout the afternoon. It was the worst day of trading since a three-week rally began to lift battered shares.

The Dow Jones industrial average closed down about 254.16 . points or 3.2 percent to 7,522.02, while the broader Standard & Poor’s 500-stock index was off 3.4 percent or 28.41 points to 787.53, unwinding some gains from last week. The technology heavy Nasdaq was down 2.8 percent or 43.40 points, to 1,501.80. Oil prices settled down $3.97, at $48.41 a barrel.

“If the government would stop doing the private sector’s work, I think we might be a little better off,” said Don Bright, director of the firm Bright Trading. “But at this point it might be too late.”

Shares of General Motors dropped 25 percent while the cost of protecting its credit rose, according to CMA, which tracks credit conditions. Shares of Ford, which is not receiving federal bailout money, were pulled nearly 7 percent lower by broader concerns about the auto industry.

On Sunday, the White House pushed out the chairman of General Motors, Rick Wagoner, and instructed Chrysler to form a partnership with the Italian automaker Fiat within 30 days as conditions for receiving another round of government aid. The administration signaled that it did not have confidence in restructuring plans put forth by the struggling automakers.

The moves came just hours after the board of the French automaker PSA Peugeot Citroën said it had fired its chief executive.

In a speech on Monday morning, President Obama said the auto industry had reached a critical point, and that its transformation would be a painful but necessary process.

“Year after year, decade after decade, we have seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us,” Mr. Obama said in his prepared remarks. “Well, we have reached the end of that road.”

Still, while investors worried about the implications of a stronger government hand in the auto industry, some analysts suggested that the Obama administration’s intervention was all but inevitable. G.M. and Chrysler have been burning through cash as auto sales dry up.

“The government is staking out a more aggressive posture than you might have thought, which suggests a more decisive solution than death by a thousand cuts,” said Dana Johnson, chief economist at Comerica, who follows the industry. “I don’t think people should be alarmed.”

The convulsions in the auto industry came as global leaders prepare to meet Thursday in London to discuss how to revive global growth and improve financial regulation. But investors are concerned about a rift between the United States and Europe over how to address the deepening recession.

“I’m not sure the worst is behind us,” Valérie Cazaban, a fund manager at Stratège Finance in Paris, said. “We’re waiting for the G-20 and we’re not sure everyone is in agreement on what needs to be done.”

The euro zone does not appear ready to follow the Obama administration’s lead on fiscal stimulus, Ms. Cazaban said. The European Central Bank, however, is expected to cut its main interest rate target by half a percentage point, to 1 percent, when its policy council meets Thursday, as official interest rates around the world continue to move toward zero.

“Market psychology is fragile at the moment,” Ms. Cazaban said, “but sentiment has improved. If the G-20 is able to work out a common purpose, then a more sustainable market rally is possible.”

The weakness of confidence was underlined Monday by data showing European Union business and consumer sentiment fell in March to the lowest level since 1985, when the E.U. began keeping the statistics. The European Commission reported Monday from Brussels that its economic sentiment indicator for the 27 nations of the European Union fell to 60.4, from 60.9 in February.

Resurgent concerns about the health of the American banking sector also tempered the mood of investors.

“Some banks are going to need large amounts of assistance,” the Treasury secretary, Timothy F. Geithner, said Sunday, “and we’re going to make sure that assistance comes with conditions designed to make sure they restructure, provide accountability for management and ensure that these institutions are cleaner and stronger going forward.”

Leading executives at JP Morgan Chase and Bank of America said that March had been tougher for them than the first two months of the year.

Peugeot fell 6.5 percent in Paris trading. But financial shares were the big losers; Crédit Agricole fell 9.2 percent, Barclays 6.3 percent and Deutsche Bank 9.3 percent.

UBS fell 6.9 percent. The Swiss bank will cut 8,000 more jobs and write down at least another billion dollars of illiquid assets, the newspaper Sonntag reported Sunday. A UBS spokesman declined to comment, saying, “We don’t discuss rumors.”

The Tokyo benchmark Nikkei 225 stock average fell 4.5 percent, led by slumps in the shares of the country’s carmakers. Toyota Motor shed 3.7 percent, Honda fell 6.7 percent and Nissan dropped 7.7 percent. Suppliers also were hard hit by worries about the potential industrywide fallout that a collapse of Chrysler or General Motors would mean.

News earlier in the day that Japan’s industrial output had slipped for a fifth consecutive month revealed — once again — the severe impact of slumping exports and weak domestic demand, which has forced manufacturers across the country to cut back production and shed workers.