NEW YORK (AP) - Investors sent stocks lower yesterday as anxiety over the growing list of firms affected by investment manager Bernard Madoff and the potential losses to the financial sector took center stage on Wall Street.

Investors also were nervous ahead of earnings reports later this week from the country's two largest investment banks, Goldman Sachs Group Inc. and Morgan Stanley.

Stocks had traded mixed early on as investors were relieved to hear that President George W Bush was working on providing short-term government help for the auto industry. The Senate's rejection of a $14 billion bailout for automakers last week had raised the possibility of a major bankruptcy, which some analysts say would result in as many as three million US job losses next year.

But as that fear eased somewhat, it gave way to concerns about companies' exposure to Mr. Madoff's fund. Well respected in the investment community after serving as chairman of the Nasdaq Stock Market, Mr. Madoff was arrested on Thursday for orchestrating what prosecutors say was a $50 billion Ponzi scheme to defraud investors.

Firms with exposure include HSBC Holdings plc., Banco Santander, BNP Paribas, Royal Bank of Scotland Group plc. and hedge fund Man Group plc.

"The investor psyche is already quite fragile. Scandals like this just add fuel to the fire," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management.

In addition to the potential for hefty writedowns related to the losses, investors also fear redemptions will increase as investors pull money out of funds in order to counter their losses from Madoff-related investments.

"If you start to see those redemptions building, it's going to add more selling pressure on the market," said Quincy Krosby, chief investment strategist at The Hartford Financial Services Group Inc.

Wall Street is also anticipating a bleak report from Goldman Sachs today. Analysts are expecting the investment bank to report a loss of $3.50 per share, according to a poll by Thomson Reuters. It would be Goldman's first quarterly loss since it went public in 1999. Morgan Stanley reports results on Wednesday.

According to preliminary calculations, the Dow Jones industrial average fell 65.15, or 0.75 percent, to 8,564.53. The Standard & Poor's 500 index lost 11.16, or 1.27 percent, to 868.57, while the Nasdaq composite index fell 32.38, or 2.1 percent, to 1,508.34.

The Russell 2000 index of smaller companies fell 17.63, or 3.76 percent, to 450.8.

Declining issues outnumbered advancers by about three-to-one on the New York Stock Exchange, where volume came to a light 1.21 billion shares.

Volume is expected to remain light this week, the last full week of trading this year, ahead of the holidays. Analysts were quick to point out that light volume often skews the market's moves.

"There doesn't seem to be a whole lot of activity in the market right now," said Joe Keetle, senior wealth manager of Dawson Wealth Management. "On small volume, the market can move dramatically one way or the other."

Investors also seemed hesitant to make any major moves ahead of the Federal Reserve's decision today on interest rates. Some analysts anticipate policy makers will cut the key rate by a half-point to 0.5 percent, while others expect a three-quarter-point reduction to 0.25 percent - which would be the lowest key rate on records going back to 1954.

"A Fed ease this week has long been anticipated by the market; the only news would be if the Fed did not cut," Mr. Gayle said. He added that the market will probably pay close attention to the statement the central bank releases about the economy and the possibility of future policy actions.

Despite yesterday's moderate decline, investors have been showing a greater tolerance for bad economic and corporate news in recent sessions, leading some analysts to believe that the market may be showing some stability after the horrific selling of the past three months.

The Dow ended last week down 0.07 percent; the S&P 500 index finished the week up 0.42 percent; and the Nasdaq composite index ended the week up 2.08 percent. Still, the Dow is down about 35 percent for the year, while the S&P 500 and Nasdaq are down more than 40 percent.

"The market has recently done a very good job with absorbing bad news," Mr. Krosby said. "The key is no major surprises for the market."

In addition to a rate cut, investors are anticipating some sort of resolution for the auto industry this week.

Following the legislative defeat on Thursday, the administration said it was considering several options.