Stocks on Wall Street fell for a third day on concern lawmakers will derail a White House plan to bail out banks even as the chairman of the Federal Reserve, Ben Bernanke, warned of “grave threats” facing the American economy.

The Standard & Poor’s 500 Index swung between gains and losses more than 40 times as Mr. Bernanke fended off congressional criticism of the $700 billion rescue proposal and investors weighed the benefits of Warren Buffett’s $5 billion investment in Goldman Sachs Group Inc. Washington Mutual Inc. tumbled 29%, Citigroup Inc. sank 5.2%, and Morgan Stanley lost 11%.

“The concern is that this is not resolved fast enough or completely enough to restore our credit markets to health,” a fund manager at Clover Capital Management in Rochester, N.Y., which oversees $2.8 billion. “If credit markets are not restored to health, the economic implications are likely to be broad and deep.”

Two stocks retreated for each that gained on the New York Stock Exchange. The S&P 500, which yesterday capped its biggest two-day slump in six years, extended its decline this week to 5.5%. Less than 1.1 billion shares changed hands on the NYSE, about half the level of a week ago.

Washington Mutual, the savings and loan that put itself up for sale last week, fell 94 cents to $2.26. S&P lowered its credit rating for the second time in nine days because of the increasing likelihood that a deal may not include the whole company.

Citigroup Inc. declined for a third day, losing $1.03 to $18.96. Morgan Stanley, which along with Goldman Sachs became a bank-holding company on September 21 to gain greater access to federal funds, tumbled $3.21 to $24.79.

The S&P 500 Financials Index retreated 1.5%, extending its decline this week to more than 11%. Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won’t happen quickly enough to ease short-term funding constraints. The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43%, the highest since January.

Home Depot Inc. fell 24 cents to $25.02. Sales of existing homes dropped 2.2% to an annual rate of 4.91 million units in August, topping the 1.2% decrease forecast by economists. The National Association of Realtors also said the median price declined 9.5% from August 2007.

The Morgan Stanley Cyclical Index of companies considered most sensitive to economic growth slumped 1.6%, bringing its 3-day decline to 8%. Citigroup and Eaton Corp., a manufacturer of products for industrial and automotive markets, led the gauge’s retreat.

“Economic activity appears to have decelerated broadly,” Mr. Bernanke said yesterday in remarks prepared for a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on September 16. “Stabilization of our financial system is an essential precondition for economic recovery.”