Wall Street in retreat

NEW YORK (CNNMoney.com) -- Stocks edged lower Tuesday afternoon as worries about banking sector profits weighed on investors ahead of the upcoming November jobs report and Federal Reserve policy meeting.

The Dow Jones industrial average (Charts) lost 0.4 percent with under 2 hours left in the session. The broader S&P 500 (Charts) index lost 0.6 percent. The tech-fueled Nasdaq (Charts) composite lost 0.7 percent.

The bank sector slid Tuesday, falling for a second session in a row on revived profit worries following negative notes from a pair of brokerages.

Stocks gained last week at the end of a weak November, marred by worries about how the housing and credit market crisis will hurt the economy long term. Those worries dominated again Monday, despite the White House's pledge to aid subprime mortgage holders.

Wall Street is now looking to Friday's November jobs report and next week's Fed-policy meeting for guidance.

Investors are feeling cautiously optimistic right now about those two upcoming events and that's limiting any stock weakness despite the worries about subprime, said Jack Ablin, chief investment officer at Harris Private Bank.

He said that there's hope that the employment report will continue the generally positive tone of the last few cycles. Additionally, investors are looking for the Federal Reserve to cut a key short-term interest rate by at least a quarter-point, if not a half-point at the Dec. 11 policy meeting.

On Monday night, San Francisco Fed president Janet Yellen said that worsening financial markets and weak economic news have dampened the economic outlook since the last Fed policy meeting in October. Last week, Fed chief Ben Bernanke and the bank's No. 2 official, Donald Kohn, hinted that further rate cuts could be on the way, due to deteriorating conditions.

"There's a growing sense that the Fed are behind the curve, but that they know that they are behind the curve," Ablin said. "My sense is that they will want to cut rates by 50 basis points to help stabilize markets and spark a strong holiday shopping period. We could see a stock rally off that."

In other news, national home prices showed the biggest quarterly drop in 25 years in the third quarter, according to a report released Tuesday.

Among stock movers, bank shares slipped. JP Morgan Securities said that the weakening debt markets will drag on the profits of Merrill Lynch (Charts, Fortune 500), Morgan Stanley (Charts, Fortune 500), Lehman Brothers (Charts, Fortune 500) and Goldman Sachs (Charts, Fortune 500).

And brokerage Punk Ziegel downgraded a number of firms, including Bear Stearns (Charts, Fortune 500) and JP Morgan (Charts, Fortune 500).

Meanwhile, Cerberus Capital Management and H&R Block (Charts, Fortune 500) said their deal for Cerberus to buy H&R's mortgage subsidiary is now off.

Shares of Dow stock Merck (Charts, Fortune 500) slid after the drugmaker forecast 2007 and 2008 earnings that are short of analysts' expectations.

Market breadth was negative. On the New York Stock Exchange, losers topped winners five to three on volume of 810 million shares. On the Nasdaq, decliners beat winners two to one on volume of 1.4 billion shares.

Treasury prices slipped, boosting the yield on the 10-year note to 3.90 percent from 3.85 percent late Monday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar dipped versus the euro and the yen.

U.S. light crude oil for January delivery fell $1.31 to $88 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $12.90 to $807.60 an ounce.