Stocks slide pre-Fed

NEW YORK (CNNMoney.com) -- Stocks slumped Monday morning as investors eyed a regulatory setback for Microsoft and worried that Federal Reserve policy makers may not cut interest rates Tuesday by as much as has been hoped.

The Dow Jones industrial average (down 27.31 to 13,415.21, Charts), the broader S&P 500 (down 8.66 to 1,475.59, Charts) index and the tech-heavy Nasdaq composite (down 20.46 to 2,581.72, Charts) all declined nearly 90 minutes into the session.

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Former Fed Chairmain Alan Greenspan tells Fortune's Andy Serwer how he thinks Ben Bernanke is handling the current economic outlook. Play video

Stocks ended barely higher Friday, at the end of an upbeat week influenced by hopes that the Federal Reserve will cut interest rates Tuesday for the first time in over a year.

But the tone Monday was more tentative, as investors worried that the Fed might not cut a key short-term interest rate by as much as had been hoped.

Many Wall Streeters are looking for a half-percentage point cut. However, the central bank could decide to cut by a quarter-percentage point instead. There is also the possibility that the Fed will not cut the fed funds rate at all. The fed funds rate has stood at 5.25 percent since June 2006.

In recent weeks, the Fed has cut the discount rate, which impacts bank loans, and has pumped billions into the banking system in temporary overnight reserves, so as to keep liquidity flowing. However, stock investors are looking for a cut of the fed funds rate to help stimulate the economy amid the impact of the housing market collapse and subsequent fallout in the mortgage market.

Ahead of the Fed announcement, investors eyed Monday's one economic report of note, the NY Empire State index, a regional manufacturing report. The index fell to 14.7 in September from 25.1 last month, missing forecasts for a smaller drop to 18, according to Briefing.com estimates.

Also impacting early trade: comments from former Fed chairman Alan Greenspan about the current financial market turmoil. Greenspan reportedly told news outlets that a risk of recession is greater now than it was at the beginning of the year.

In an interview with Fortune, Greenspan also said that the subprime mess was an "accident waiting to happen," and that the Fed is in a tricky situation now where they can't just cut rates anymore without risking boosting inflation. (For more details, click here.)

In corporate news, Microsoft (down $0.31 to $28.73, Charts, Fortune 500) suffered a big setback when a European Union court dismissed the company's appeal of a 2004 antitrust ruling. (For details, click here.)

Ahead of their earnings reports, a variety of banks slumped, including Lehman Brothers (down $1.45 to $58.05, Charts, Fortune 500), Morgan Stanley (down $1.61 to $64.50, Charts, Fortune 500), Goldman Sachs (down $3.71 to $186.88, Charts, Fortune 500) and Bear Stearns (down $2.45 to $114.74, Charts, Fortune 500). The Amex Securities Broker/Dealer index fell by 1.5 percent.

Brokers have been among the hardest hit sectors in the financial market meltdown, and investors will be paying close attention to see what the companies have to say about the fallout. (For details, click here.)

Reminding investors of the global reach of the mortgage crisis was Northern Rock, one of Britain's largest mortgage lenders. Northern Rock slumped 30 percent in European trading as nervous investors withdrew billions, AP reported. On Friday, the stock slumped more than 30 percent as well after the company admitted it had received emergency funding from the Bank of England.

Treasury prices fell, lifting the yield on the 10-year note to 4.48 percent from 4.46 percent late Friday. Bond prices and yields move in opposite directions.

U.S. light crude oil for October delivery rose 65 cents to $79.75 a barrel on the New York Mercantile Exchange, not far from a record closing high hit late last week.

COMEX gold for December delivery rose $10.50 to $728.30 an ounce.