New York  - US stocks fell sharply on Tuesday, one day after posting their biggest gains of the year, as the US administration sought new powers to control failing financial firms.

Banking shares, which gained some 18 per cent on Monday, led the market decline amid speculation that Congress will no longer back more money for struggling Wall Street institutions.

President Barack Obama's administration asked for broad new powers to take over non-banking institutions in the wake of the controversial bail-out of insurance giant American International Group Inc.

Treasury Secretary Timothy Geithner said government control of AIG would have helped it lead an "orderly" reorganization and prevented the firm from doling out 165 million dollars in retention bonuses last week, which have sparked a furore among the public and legislators.

US lawmakers made clear that the AIG scandal had made it harder for Congress to approve another round of emergency funds for Wall Street banks, which are blamed for leading the US into financial crisis but remain critical to the wider economy.

Stocks on Monday posted their biggest rally since November after Geithner unveiled the details of a long-awaited 1-trillion-dollar plan to take toxic mortgage assets off the balance sheets of US banks.

The blue-chip Dow Jones Industrial Average dropped 115.65 points, or 1.5 per cent, to 7,660.21, after surging nearly 500 points on Monday. The broader Standard & Poor's 500 Index was down 16.88 points, or 2.1 per cent, to 806.04. The technology-heavy Nasdaq Composite Index fell 39.29 points, or 2.5 per cent, to 1,516.48.

The US currency climbed against the euro to 74.25 euro cents from 73.33 euro cents on Monday, and the dollar climbed to 97.9 Japanese yen from 97.06 Japanese yen. dpa