NEW YORK - INVESTORS are having doubts about banks' profit reports, and wondering whether their better-than-expected performance mask larger problems with bad debt.

Stocks fell sharply early on Monday as investors sold financial stocks and looked to lock in profits after a six-week rally. The major indexes slid about 2 per cent, including the Dow Jones industrial average, which fell 175 points.

Worries about the financial industry overshadowed Oracle Corp.'s announcement that it would acquire Sun Microsystems Inc for US$7.4 billion (S$11.2 billion) and a $6 billion bid by PepsiCo Inc to acquire its two biggest bottlers.

The news came at the start of the busiest week yet for results from the first three months of the year. Investors are looking for signals that a rally from 12-year lows in early March can continue.

Wall Street has been emboldened by early signals that the economy could be stabilising, but after a 24 per cent surge in the Dow Jones industrial average some investors are asking whether the market has risen too quickly.

In the first hour of trading, the Dow fell 176.58, or 2.2 per cent, to 7,954.75.

Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 19.94, or 2.3 per cent, to 849.66, and the Nasdaq composite index fell 39.87, or 2.4 per cent, to 1,633.20.

Concerns about the sustainability of bank earnings weighed on financial stocks. Bank of America said earned more than expected in the first quarter but also that it set aside $13.4 billion to cover losses on souring debt. The stock fell 10.6 per cent.

Citigroup Inc fell 10.6 per cent, while JPMorgan slipped 4.3 per cent. -- AP