NEW YORK - US STOCKS plunged on Monday as renewed fears for the banking sector and the overall economic outlook sent investors scurrying to lock in gains from a six-week rally.

The Dow slumped 289.44 points (3.56 per cent) at the close to 7,841.89 while the Nasdaq composite tumbled 64.86 points (3.88 per cent) to 1,608.21.

The broad-market Standard & Poor's 500 index slid 37.19 points (4.28 per cent) to a preliminary close of 832.41.

Investors shrugged off news that government-rescued Bank of America recorded a profit of US$4.2 billion (S$6.3 billion) in the first quarter, since the result was boosted by one-time gains and the lender set aside more cash to cover possible bad loans.

Paul Nolte at Hinsdale Investments said that even though banks have returned to profitability, the source of these profits may not be sustainable.

'With much of the gains coming from the benevolent government aid - that is not likely to be repeated in subsequent quarters - the above-average (and positive) earnings may be nothing more than a one-quarter phenomenon,' Mr Nolte said.

Analysts at Charles Schwab. said investors were spooked by Bank of America's warnings of weaker loan performance and its boosting of reserves for bad loans.

The analysts said bank chairman Kenneth Lewis heightened fears by stating that 'credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve.' -- AFP