The Dow Jones industrial average fell more than 130 points.

The Fed offered $20 billion in 28-day credit through an auction Monday. The central bank will not release the results until Wednesday, but the aim of the auction is to encourage commercial banks to borrow from the Fed. That, in turn, is designed to boost banks' lending to businesses and consumers and keep the economy humming.

Last week, the Fed disappointed investors when it cut interest rates by only a quarter-point, which was less than some analysts expected. Wall Street is pleased that policy makers say they will keep trying to lift market confidence, which has dwindled since home foreclosures started soaring, but the market is so far unconvinced that the auction will be enough.

A speech Sunday night by former Fed Chairman Alan Greenspan added to the market's ill humor. Greenspan said "stagflation" — when inflation accelerates and the economy weakens — is a growing possibility, given last week's data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again.

Higher inflation is also a problem for consumers, especially during the holiday season. With only a week left until Christmas, sales data has suggested tepid spending by Americans, who are struggling with higher food and energy costs and tumbling home values.

"The consumer is two-thirds of our economy. The consumer holds the key to whether we have a recession in 2008," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc. in St. Louis.

The Dow fell 160.14, or 1.20 percent, to 13,179.71.

Broader stock indicators also declined. The Standard & Poor's 500 index dropped 20.09, or 1.37 percent, to 1,447.86, and the Nasdaq composite index fell 54.67, or 2.07 percent, to 2,581.07.

Peter Cardillo, chief market economist at Avalon Partners Inc., said the market is volatile ahead of Friday's "quadruple witching," a quarterly occurrence during which contracts expire for stock index futures, stock index options, stock options and single stock futures.

The expirations magnified Wall Street's mood, which has been downbeat because of uncertainty in the market about the effectiveness of the Fed's actions and the overall economy. "It's going to be a bumpy ride from here till the end of the year," Cardillo said.

President Bush in a speech on Monday said "there's definitely some storm clouds and concern" because of the nation's credit crunch and mortgage problems.

Last week, the Dow dropped 2.10 percent, the S&P 500 fell 2.44 percent and the Nasdaq lost 2.60 percent.

Government bond prices rose as stocks fell. The yield on the 10-year Treasury note, which moves opposite its price, slipped to 4.19 percent from 4.24 percent late Friday.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude futures fell 64 cents to settle at $90.63 a barrel on the New York Mercantile Exchange.

In economic data, the U.S. government said the current account deficit, the broadest measure of international trade, narrowed in the third quarter compared to the second quarter, as expected, to the lowest level in two years.

The New York Fed's Empire State Manufacturing Index fell more sharply in December than economists anticipated, while the National Association of Home Builders said its housing market index held steady in November at its lowest level since it started the index in 1985.

Wall Street started 2007 soaring due to strong merger-and-acquisition activity, but found little consolation in deal-making Monday.

Diversified manufacturer Ingersoll-Rand Co. said it will buy air conditioner maker Trane Inc. for $10.1 billion. Ingersoll-Rand shares fell $6.067 or 12.3 percent, to $43.11, Trane surged $8.06, or 22 percent, to $45.23.

Meanwhile, Aon Corp. said it will sell two insurance units for $2.75 billion in separate cash deals, and the conglomerate Loews Corp. said its board approved a spinoff of cigarette maker Lorillard Inc.

Aon rose 63 cents to $49.57.

Loews rose $1.06, or 2.3 percent, $47.86.

And National Oilwell Varco Inc. said it is buying a smaller Houston-based oil drilling equipment maker, Grant Prideco Inc. for $7.37 billion.

National Oilwell fell $7.10, or 9.2 percent, to $70.27. Grant Prideco rose $6.30, or 13 percent, to $53.76.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 1.06 billion shares.

Overseas, Japan's Nikkei stock average fell 1.71 percent, and Hong Kong's Hang Seng index fell 3.51 percent. Britain's FTSE 100 dropped 1.86 percent, Germany's DAX index lost 1.55 percent and France's CAC-40 declined 1.61 percent.

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