Oil futures fell more than $9 to near $136 a barrel in volatile trade on technical factors, helping stocks on both sides of the Atlantic to pare losses just before European markets closed.

The S&P financial index fell 2.8 percent as it touched levels last seen in 1998.

"We’re back into the panic mode we experienced back in mid-March. The distrust is at a very high level and it is totally justified," said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management in Paris.

"The U.S. housing crisis is getting worse, and it has now spread from the ’subprime’ segment to the ’prime’ segment, with regional banks getting hit now," she added.

Federal Reserve Chairman Ben Bernanke provided little comfort for investors anxious about the economy, saying in testimony before the Senate Banking Committee that financial markets and institutions remain under "considerable stress."

Bernanke’s comments about increased risks to inflation and economic growth were expected, but still caused pause," said Steve Goldman, market strategist at Weeden & Co. in Greenwich, Connecticut.

"It’s still alarming to hear and the market did react to this news, given Bernanke didn’t sugar-coat the situation," Goldman said.

Just before 1 p.m. EDT (6 p.m. British time), the Dow Jones industrial average was up 0.82 point, or 0.01 percent, at 11,056.01. The broad Standard & Poor’s 500 Index was down 2.09 points, or 0.17 percent, at 1,226.21. The Nasdaq Composite Index was up 15.78 points, or 0.71 percent, at 2,228.65.

Shares of Fannie Mae slid 17.5 percent and Freddie Mac tumbled 16.8 percent.

The two mortgage finance giants guarantee almost $5 trillion (2.5 trillion pounds) in U.S. mortgages.

Shares of General Motors, a Dow component, slid almost 6 percent after the automaker announced a restructuring plan and said it is suspending its dividend as part of efforts to bolster its finances.

In Europe, the FTSEurofirst 300 index of top European shares unofficially ended 2.1 percent lower at 1,110.09 points, after falling by more than 3 percent in earlier trade. It was the index’s lowest close since May 2005.

Banks bore the brunt of the slide. Fortis the biggest loser. The stock sank 11 percent on worries the Belgian-Dutch financial services group might have to raise more funds and after the Dutch market regulator said it was looking into the company’s funding plan.

Fortis said it did not envisage any additional capital increase.

Royal Bank of Scotland shed 7.1 percent, Natixis dropped 9.7 percent and Anglo Irish Bank fell 6.9 percent.

Government debt rose even as U.S. Treasury debt prices pared some gains, losing some of their safe-haven allure as Wall Street attempted to rebound.

The benchmark 10-year U.S. Treasury note rose 8/32 to yield at 3.82 percent. The 30-year bond added 3/32 to yield 4.45 percent.

The dollar fell against major currencies, with the U.S. Dollar Index off 0.29 percent at 71.739. Against the yen, the dollar was down 1.13 percent at 104.94.

The euro rose 0.05 percent at $1.5911.

"We’re seeing broad based risk aversion across asset classes," said Niels From, chief analyst at Nordea.

U.S. light sweet crude oil was last down $6.97 to $138.21 per barrel.

Gold hit a four-month high after Bernanke’s comments weighed on the dollar, triggered a drop in U.S. equity markets and fueled safe-haven buying of the metal.

Spot gold prices fell $2.45 to $969.25 an ounce.

"The problems on the equity markets, uncertainty, and general risk aversion are all bullish for gold at the moment," said Lehman Brothers analyst Michael Widmer.

Overnight in Asia, stocks fell to a two-year low as investor confidence waned in regional banks, which face high inflation, tighter lending standards and massive volatility from overseas markets.

Japan’s Nikkei share average ended down 2 percent to its lowest level since April 1. The MSCI pan-Asia equity index dropped 2.5 percent to almost a two-year low.