The news? It was all bleak if you live on Wall Street

NEW YORK - U.S. stocks fell sharply Tuesday, sending the Dow to its worst day in two months, as investors became unnerved by a surprise rate increase in China, disappointing earnings and fresh concerns about the effect bad mortgages could have on banks.

The Dow Jones industrial average sank 165.07 points, or 1.5 percent, to 10,978.62, ending below 11,000 for the first time in more than a week.

Blue-chip losses were led by shares of Bank of America, which fell 4.4 percent after a report the bank might be forced to repurchase bad mortgages.

That was the Dow's worst drop since early August. The move also follows big gains for stocks since the beginning of September.

"You've got to admit it was overdue. We've had a straight shot since the first day of September; it's been pretty much unrelenting," said Marc Pado, U.S. market strategist at Cantor Fitzgerald, of Wall Street's six-week climb.

The market was also disappointed with results from tech-industry giants Apple and IBM Corp. Pado said "lofty expectations that were not realistic" had shares of both hitting historic highs during Monday's session.

The S&P 500 fell 18.81 points, or 1.6 percent, to 1,165.90, with energy and materials weighing most heavily among its 10 industry groups. The financial sector, up earlier, turned lower in afternoon trading.

For every share rising, five fell on the New York Stock Exchange, where 1.27 billion shares traded.

Tuesday, Bank of America said its quarterly loss stemmed from a one-time hit related to credit-card-reform legislation passed earlier in the year.

But its shares sank, dragging down the financial sector, after reports that institutional investors, including bond-giant Pimco and money manager BlackRock, along with the New York Federal Reserve, were pressuring the bank to repurchase troubled mortgages.

Before the open, China's rate-increase announcement drew a negative response from Wall Street, which has not welcomed any move by China viewed as an effort to curb economic growth.

Both Apple and IBM reported quarterly results late Monday, with each exceeding earnings forecasts, but investors still found something to pan in both reports.

The major indexes had advanced Monday, with the Dow industrials ending at their highest level since May 3, a level that also helped inspire some profit taking early Tuesday.

"We closed [Monday] at the highest since early May, so we're at the upper end of the range now, or some would say we're at the bottom end of a new range," said Jay Suskind, senior vice president at Duncan-Williams.

Wall Street gave a muted reaction to economic data, which had the Labor Department estimating that new-home construction rose 0.3 percent in September.

"The housing number wasn't a surprise to the downside, which I guess was a positive. It was the Chinese rate hike with the dollar that affected the downside," Suskind said of the U.S. currency's rebounding strength.