NEW YORK (AP) -- Shares of major U.S. banks plunged Thursday as the government mulled giving Bank of America Corp. a fresh multibillion-dollar aid package, raising fears on Wall Street that the battered financial sector may need an even bigger bailout.
Bank of America shares fell as much as 28 percent - dropping to their lowest level in 17 years - on news that the bank could seek another capital injection to manage losses from its takeover of Merrill Lynch. Citigroup Inc. shares fell to a near 16-year low as investors braced for horrible fourth-quarter earnings. And JPMorgan Chase & Co. added to the pessimism with a grim earnings outlook.
The carnage fanned investor fears that mounting bank losses and a darkening economic outlook are thwarting government efforts to resuscitate the banking sector. It raised the distinct possibility that the largest financial rescue package in history may swell even further.
Bank of America, which already received $25 billion under the government's Troubled Asset Relief Program, or TARP, could get billions more to help it absorb losses from its buyout of Merrill Lynch, according to a person with knowledge of the discussions, who spoke to The Associated Press on condition of anonymity because of the sensitive nature of the discussions.
The plan could be modeled after a similar government lifeline that was thrown to Citigroup in November, the person said.
The prospect of pumping more taxpayer money into Bank of America raised immediately raised questions about whether other banks may need more capital infusions to insulate themselves from losses. The Senate on Thursday was expected to vote on whether to release the second $350 billion in financial bailout money.
Financial experts warned even that might not be enough.
"Will we need TARP 2.0? The first half wasn't used effectively so we're certainly going to need the second half. But it probably won't be enough," said Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division.
He said the likelihood that some of the $350 billion will be used for mortgage relief and perhaps for municipal governments will mean there will be less money "to deal with the banking problem."
Further government intervention into the banking sector would likely upset Republican lawmakers and could further unnerve investors worried about about the implications for shareholders of major banks.
"If the government has to step in, it may very well mean the government will have to take precedence over other shareholders," effectively wiping them out, Reinhart said. "It would cast a cloud over the entire banking industry."
The dour sentiments came despite a better-than-expected fourth-quarter earnings report from JPMorgan. The banking giant reported earnings of $702 million in the October-December quarter; analysts had expected it would break even.
Nonetheless, Chief Executive Jamie Dimon called the quarter "very disappointing" and said the bank could suffer more losses from bad loans if the economy worsens.
Dimon said during a call with journalists that the crisis in the financial industry has "gone way beyond normal."
"Everyone is struggling with this extreme environment we have ... We don't know exactly the outcome," he said.
Investors were closely watching JPMorgan's performance for clues on how other banks are weathering the crisis.
At Citigroup, analysts are bracing for dismal fourth-quarter earnings numbers. Analysts polled by Thomson Reuters, on average, predict a per-share loss of $1.19 for the fourth quarter - which would be Citigroup's deepest deficit yet. The bank has posted net losses for four consecutive quarters.
The New York-based bank has laid off thousands of employees and jettisoned several businesses to raise badly needed cash, including its prized retail brokerage, Smith Barney.
AP Business writer Madlen Read in New York contributed to this report.