Small-cap stocks started out the week on a sour note, resuming the downward spiral in jolting fashion to post the largest one-day decline of 2008 as fears of a global financial pandemic triggered wave after wave of selling. The Russell 2000 (NYSE:IWM) shed 47.07, or 6.68%, to 657.72, the lowest daily close since March 17. For the year, small caps are down 14.1%, while the Dow is off 21.5% and the S&P 500 is down 24.1%.

The market woke up to news that Europe is now being forced to bail out financial institutions, as Fortis became the first eurozone bank to sag under the weight of global debt issues. European shares slumped to the lowest daily close in 3 ½ years, which set the tone for difficult day in U.S. stocks. When lawmakers in Washington shot down the $700-billion rescue plan for financial firms by a vote of 228 to 205, it extended the decline, with the S&P 500 plunging more than 8% at the intraday lows. The S&P 500 tumbled to the lowest point since October 2004 with dramatic declines in financial shares leading the way lower.

Within financials, Bank of America (NYSE:BAC) was off some 12%, and American Express Co. (NYSE:AXP) lost nearly 13%. Wachovia Bank (NYSE:WB) collapsed about 80% as the bank was forced to slough off most of its banking operations to Citigroup Inc. (NYSE:C), as Wachovia became the latest shocking failure in the on-going saga. The small-cap arena is heavily layered with mid- to small-tier banks, and even though the big-name firms are dominating the national headlines, these smaller firms are not immune to the financial contagion, which is reflected in the slide in the Russell 2000.

Technology shares struggled Friday on fears that political wrangling could jeopardize the financial rescue bill, and today’s rejection of the plan extended the woes for tech stocks as the Nasdaq 100 dropped more than 10%. Among tech stocks, Apple Inc. (Nasdaq:AAPL) was off some 16%, while bellwether Microsoft Corp. (Nasdaq:MSFT) was down about 4%.

Broad market sectors on the decline today were paced by financial, tech themes and even commodity firms. The biggest losses were seen in coal and steel stocks, but metals, asset management companies, oil refiners, regional banks and . . .

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