For Dow, another 12-year low
S&P also finishes at lowest level in more than a decade as Wall Street resumes its retreat on economic worries.
NEW YORK (CNNMoney.com) -- Stocks tumbled Monday, with the Dow and S&P 500 ending at fresh 12-year lows, as Merck's $41 billion purchase of Schering-Plough failed to distract investors from worries about the economy.
The Dow Jones industrial average (INDU) lost 80 points, or 1.2%, to end at 6,547.05, its lowest point since April 15, 1997.
The S&P 500 (SPX) index lost nearly 7 points or 1%, to end at 676.53, its lowest point since Sept. 12, 1996.
The Nasdaq composite (COMP) lost 25 points or 2%, to end at 1,268.64, its lowest point since Oct. 9, 2002.
"We're seeing more of the same," said John Buckingham, chief investment officer at Al Frank Asset Management. "With an absence of good news, the path of least resistance is down."
Yet, with the Dow and S&P 500 both down over 25% year to date, and investor sentiment at or near record lows, a short, sharp rally could be in the works, he said.
"To the extent that you get some piece of good news, you could see a big rally," Buckingham said. "But right now every rally attempt is being met with selling."
Since closing at its all-time high of 14,164.53 on Oct. 9, 2007, the Dow has lost nearly 54%. The S&P 500, which also hit its high of 1565.15 on Oct. 9 has lost around 57%.
"Valuations are reasonably attractive outside of financials, but most investors are in defensive mode," said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Company. "They've seen too many losses and are sitting on the sidelines."
Nyheim said stocks aren't likely to make a bigger move up until later in the year. In the short term, investors will be keeping an eye on the fluctuations in the credit markets, and the weekly and monthly employment figures.
Stocks mustered gains Friday - at the end of a rough week - with the Dow and S&P 500 bouncing off 12-year lows following a bleak February jobs report.
On Tuesday morning, Federal Reserve Chairman Ben Bernanke speaks at the Council on Foreign Relations in Washington, D.C. about financial reforms to handle risk in the economy.
In addition, the government will release a report on January wholesale inventories.
Drugmaker Merger: Dow component Merck (MRK, Fortune 500) said it's buying Schering-Plough (SGP, Fortune 500) in a $41.1 billion cash-and-stock deal that is aimed at helping the company better compete with pharmaceutical industry leader Pfizer. Merck shares slipped 7.7% and Schering shares rallied over 14%.
Banks: A variety of bank shares bounced back, with Bank of America (BAC, Fortune 500) leading the way, rising over 19%. Other gainers included Wells Fargo (WFC, Fortune 500) and US Bancorp (DEL). The KBW Bank (BKX) index added 5.3%.
Over the weekend, reports in Fortune and other publications named some of the companies that benefited from the government's multi-billion bailout of insurer American International Group (AIG, Fortune 500).
The counterparties to billions in credit default swaps included U.S. based firm Goldman Sachs (GS, Fortune 500) as well as European firms Deutsche Bank (DB), UBS (UBS) and Société Générale among others.
Other movers: Some of the economically-sensitive stocks that have gotten pummeled lately bounced back, including Dow components Alcoa (AA, Fortune 500), Caterpillar (CAT, Fortune 500), General Motors (GM, Fortune 500) and General Electric (GE, Fortune 500).
GE rallied after it said it was selling bonds guaranteed by the U.S. government.
But other Dow components slumped, including DuPont (DD, Fortune 500), AT&T (T, Fortune 500), Procter & Gamble (PG, Fortune 500), Hewlett-Packard (HPQ, Fortune 500) and IBM (IBM, Fortune 500).
StemCells (STEM) and Geron (GERN), two biotechs that engage in stem cell research, rallied Monday after President Obama reversed a Bush-era policy that limited federal aid for stem cell research.
Market breadth was negative. On the New York Stock Exchange, losers beat winners seven to three on volume of 1.56 billion shares. On the Nasdaq, decliners topped advancers by more than two to one on volume of 2.08 billion shares.
Also in play: Comments from influential investor Warren Buffett that the economy has fallen off a cliff, but that it will recover.
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 2.91% from 2.87% Friday. Treasury prices and yields move in opposite directions.
Lending rates tightened. The 3-month Libor rate rose to 1.31% from 1.29% Friday, while the overnight Libor rate rose to 0.33% from 0.32% Friday, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, Asian markets ended lower and European markets ended mixed.
In currency trading, the dollar rose versus the euro and the yen.
U.S. light crude oil for April delivery rose $1.55 to settle at $47.07 a barrel on the New York Mercantile Exchange.
COMEX gold for April delivery fell $24.70 to settle at $918 an ounce. 
