* Home buyer tax credit fears hurt financials, builders
* Commodity shares retreat amid U.S. dollar's bounce
* Dow off 1.1 pct; S&P off 1.2 pct; Nasdaq off 0.6 pct (Updates to close, adds byline)
By Ellis Mnyandu
NEW YORK, Oct 26 (Reuters) - U.S. stocks fell for a second straight session on Monday as investors ditched home builders and financials on fears that a federal home buyer tax credit might be phased out, while commodity shares succumbed to pressure from the higher U.S. dollar.
Trading was choppy. Stocks initially started on firmer footing, with indexes up more than 1 percent shortly after the open, but the bounce quickly faded as the U.S. dollar rebounded and investors fretted about the financial sector's prospects.
An economic research firm, ISI Group, said in a Monday note there could be an agreement to phase out the home buyer tax credit over 13 months, rather than expand it, as some had hoped.
JPMorgan, down 3.1 percent at $43.82, was among the top drags, along with Bank of America, down 5.1 percent at $15.40. The S&P financial index slipped 2.5 percent, while the Dow Jones U.S. home construction index declined 3.4 percent.
"It's a tough sell now to Congress to say we need another extension of the home buyer tax credit when supposedly we are out of the recession, according to economists, and housing is doing well again," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "If they are talking more of a phase-out than an extension, that certainly will hurt the market."
Without the home buyer credit, investors worry that the struggling housing market might lose a crucial incentive that has spurred hopes of stabilization in recent months.
The Dow Jones industrial average dropped 104.22 points, or 1.05 percent, to 9,867.96. The Standard & Poor's 500 Index shed 12.65 points, or 1.17 percent, to 1,066.95. The Nasdaq Composite Index fell 12.62 points, or 0.59 percent, to 2,141.85.
The S&P 500 is now up 57.7 percent from the 12-year closing low of March 9, having slipped from its recovery peak when it was up 62.3 percent from that low.
Financials also came under pressure from the news that Dutch banking, insurance and asset management company ING will split in two as part of a plan to pay back government bailout funds and return to its retail savings bank roots.
That plan might set a precedent for some of the U.S. institutions that received federal government bailout funds, said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
"If the banks are going to focus on mainly repaying the government, they are not going to lend, they are going to cut back on mortgages, and make it even stricter to get a mortgage," he said. "It's the domino effect and that hurts the home builders."
Among home builders' shares, luxury home builder Toll Brothers slumped 4.2 percent to $18.36 and those of No. 3 U.S. homebuilder Lennar Corp shed 4 percent to $13.57. Beazer Home, the ninth-largest U.S. home builder, declined 4.4 percent to $4.83.
The CBOE Volatility index jumped 9.2 percent, its biggest one-day percentage surge in nearly two months.
The U.S. dollar rallied from a 14-month low against the euro as falling stock and commodity prices dampened risk appetite, prompting investors to lock in recent gains in other currencies.
The dollar's rise pressured commodity prices, which hurt shares of natural resource companies. Chevron Corp, due to post quarterly results this week, ended down 1.6 percent at $75.45.
On the bright side, RadioShack Corp soared to a 13-month high after the electronics chain reported quarterly revenue above Wall Street's forecasts. The stock shot up 15.9 percent to $18.15. (Editing by Jan Paschal)