3rd UPDATE: Financial Shares Tumble After Weak Jobs Report

A weak U.S. jobs report sent financial shares into a tailspin Friday, led by declines in regional banks and credit-card lenders, as investors feared a stall in the economic recovery.

Regional banks are already wrestling with how to maintain profits amid low interest rates. Flagging loan growth could exacerbate that. In addition, a slump in the economy could ultimately lead to a return of credit-quality issues if unemployment rises.

Many big banks are trading below book value, suggesting investors fear a double-dip recession and rising loan losses, said Fred Cummings, a former bank stock analyst and the president of Elizabeth Park Capital Management, an asset management firm in Beachwood, Ohio, that focuses on financial services.

Loan losses have been improving for more than a year, translating into earnings growth because banks haven't had to set aside as much money for delinquent loans. "Things have to get a lot worse" for that trend to reverse, however, Cummings said.

The Labor Department's job report disappointed for the third straight month, with nonfarm payrolls growing 69,000 in May, the smallest gain in a year and below forecasts calling for 155,000. Job gains for March and April were also revised lower. The unemployment rate was 8.2%, up one-tenth of a percentage point, the first increase in nearly a year.

Financial stocks within the Standard & Poor's 1500 fell 3.58% in afternoon trading, while the KBW Bank Index of 24 large bank stocks fell 4.88%. The S&P 500 index was down 2.46%.

Bank stocks had been rallying this year, with the KBW bank stock index up 6.48% year-to-date despite Friday's losses, compared with the Dow Jones Industrial Average, which is now flat for the year. The outperformance of bank stocks so far this year "has hit an air pocket," said Gerard Cassidy, a bank stock analyst with RBC Capital Markets. "We're going to need to see a resurgence in the economy to drive bank stocks higher from here."

Regional banks took the brunt of the selloff. Shares of Huntington Bancshares Inc. (HBAN) in Columbus, Ohio, fell 6.6%, to $6.11; shares of Comerica Inc. (CMA) in Dallas fell 5.72%, to $28.68; BB&T Corp. (BBT) in Winston-Salem, N.C., fell 6.2%, to $28.35; and U.S. Bancorp (USB) in Minneapolis fell 4.9%, to $29.60.

The selloff is particularly harsh for bank stocks that have risen the most this year, such as shares of Huntington, which were up 19% year-to-date before Friday. "On days like today you sell the winners and do your best to hold on to those that have lagged," said Terry McEvoy, an analyst with Oppenheimer & Co.

Shares of credit-card lenders also weakened. Discover Financial Services (DFS) fell 7.2%, and Capital One Financial Corp. (COF) fell 5.8%, to $48.40.

The losses spread broadly across the financial sector. Bank of America Corp. (BAC) shares fell 4.5%, to $7.02, while Morgan Stanley (MS) fell 4.7%, to $12.73. Goldman Sachs Group Inc. (GS) fell 3.2% to $92.64, and J.P. Morgan Chase & Co. (JPM) fell 3.7%, to $31.93. Citigroup Inc. (C) shares fell 4.2%, to $25.39.

With an intraday low of $12.80, Morgan Stanley hit a low last seen about eight months ago. J.P. Morgan's early Friday skid to $32.05 was last hit late last December and Goldman's $92.35 was a nearly six-month low.

Concerns about Europe also continued to weigh heavily on the financial sector. Shares of Deutsche Bank AG (DB, DBK.XE) fell 7.1%, to $33.41, while shares of Credit Suisse Group AG (CS, CSGN.VX) fell 0.8%, to $18.98, and shares of UBS AG (UBS, UBSN.VX) fell 1.2%, to $11.24.

European stocks were already down before the U.S. jobs report. The number of people out of work in the euro zone increased in April to the highest number since the introduction of the common currency.

-By Liz Moyer and Matthias Rieker, Dow Jones Newswires; 212-416-2512; [e-mail]; Twitter: @lizmoyer

--Chris Dieterich and Corrie Driebusch contributed to this article.