NEW YORK (AP) - Stocks pulled back sharply yesterday, erasing most of the previous session's big gains as investors grew concerned about high commodities prices and the possibility that banks remain vulnerable to further problems from soured debt. The Dow Jones industrial average fell nearly 300 points after rising 420 on Tuesday.

Some retrenchment was to be expected after the previous day's huge advance. But the decline also reflects investors' continuing uneasiness about the world's financial system and the US economy.

Talk swirled about whether further write-downs are in the offing after Merrill Lynch & Co. filed a lawsuit against a company involved in a debt transaction with the investment bank. Merrill claimed in the litigation that Security Capital Assuance Inc. owed it up to $3.1 billion after backing out of financial transactions.

News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac, a move that could help struggling homeowners, for a time helped quell some of the market's fears. But it could not stave off selling late in the session by investors who have seen big advances evaporate many times during the course of the credit markets crisis and decided to preserve some of their gains.

Investors sent stocks charging higher on Tuesday on stronger-than-expected investment bank results and several moves from the Federal Reserve in recent days, including a 0.75 percentage point rate cut aimed at jump-starting the credit markets. The Dow had its second 400-plus point gain in six sessions.

George Shipp, chief investment officer at Scott & Stringfellow, said some investors are still uneasy about the health of the markets. He said back-and-forth days will likely continue as Wall Street tries to feel its way forward.

"Nobody wants to make the first move. There is liquidity on the sidelines. It doesn't really know what to do right now," he said, adding that investors are trying to determine whether moves by the Fed and other regulators to stimulate the economy and stabilize the markets will take hold.

"Clearly there is fear. I would say the needle is pointing more toward fear than greed right now," he said.

According to preliminary calculations, the Dow yesterday fell 293, or 2.36 percent, to 12,099.66.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 32.32, or 2.43 percent, to 1,298.42, and the Nasdaq composite index fell 58.3, or 2.57 percent, to 2,209.96.

Bond prices jumped as investors again looked for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.37 percent from 3.50 percent late on Tuesday. The dollar was mixed against other major currencies, while gold prices fell sharply.

Light, sweet crude fell $4.94 to settle at $104.48 per barrel on the New York Mercantile Exchange after government figures suggested the high price of oil and gasoline are damping demand for petroleum products.

The concerns over the health of the financial system and the economy overshadowed upbeat results from Morgan Stanley, whose earnings indicated that the bank is relatively healthy like Lehman Brothers Holdings Inc. and Goldman Sachs & Co. Investors have been nervous in recent days about even big banks after JPMorgan Chase & Co. struck a deal Sunday to acquire Bear Stearns, which was on the verge of succumbing to credit troubles.

Investors' relief over Morgan Stanley follows better than expected earnings news from Lehman and Goldman on Tuesday that gave the Dow its biggest point gain in more than five years. The Dow got an extra boost after the Fed's rate cut.

The Office of Federal Housing Enterprise Oversight, which oversees government-backed Fannie and Freddie, said the changes should result in an immediate infusion of up to $200 billion into the market for mortgage-backed securities. This could mean greater demand for mortgages - an aid for struggling homeowners hoping to refinance at more favorable terms.

The Fed has slashed key rates by more than half since last summer, when the mortgage crisis claimed its grip on the global credit markets. But the housing and lending industries are still hurting.

Late on Tuesday, Visa Inc. launched the largest initial public offering in US history, selling 406 million shares at $44 apiece to raise $17.9 billion. The world's largest credit card processor is not a lender, and many investors are betting that it will easily survive the faltering US economy and credit climate. The stock traded up $12.50, or 28 percent, at $56.50.

Declining issues outpaced advancers by more than two-to-one on the New York Stock Exchange, where volume came to 1.97 billion shares compared with 1.95 billion shares traded on Tuesday.