Financials pare losses after downgrades, E.U.

SAN FRANCISCO (MarketWatch) � Financial stocks pared losses Monday along with the broader market after a series of bank downgrades and concerns that Greece still has not finalized a deal with creditors as European leaders met in Brussels.

Shares of Bank of America Corp. BAC closed down 3%, after being down 3.7% earlier, as Goldman Sachs lowered its rating on the Dow Jones Industrial Average component to neutral.

Also, Goldman took fellow blue chip J.P. Morgan Chase & Co. JPM �off its �conviction buy� list. J.P Morgan shares closed down 0.5%, after being down as much as 2.3% earlier.

In the same note, however, Goldman raised its rating on Citigroup Inc. C �to buy and deemed Morgan Stanley MS �a �conviction buy.� Despite the upgrades, shares of Citigroup closed down 2.1%, while Morgan Stanley shares shed 1.9%.

Also affecting Citigroup was a weekend Wall Street Journal report that Richard Parsons might step down as chairman. Read more on Parsons.

The Financial Select Sector SPDR XLF , an exchange-traded fund tracks financial stocks in the S&P, was off 0.9%, after being down as much as 1.8%. The SPDR S&P Bank Index KBE �declined 0.8%, after being down 1.7% earlier.

The Financial ETF is up 7.3% for the year to date and the Bank ETF is up 6.3% for the year.

Investors shouldn�t be fooled by attractive valuations in financials, said Oppenheimer & Co. strategist Brian Belski in a research note. He said that persistent high volatility in the sector may make the stocks attractive in a market upswing but that over-capacity issues, risk of overregulation and a lack of earnings growth were significant long-term challenges for the sector.

�True, many economic indicators have been improving lately and risk spreads in the credit markets have certainly fallen, but conditions remain far from optimal,� Belski said.

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The broader market was under pressure as uncertainty over Greek debt-restructuring negotiations developed over the weekend and overshadowed a meeting of members of the European Council on Monday. Those losses began to pare as the meeting wound down with most member nations showing support for the European Stability Mechanism rescue fund. Read more on Europe.

Adding further pressure on the market, U.S. economic data showed that consumer spending was largely flat in December even though income rose. Read more on consumer spending data.�

Other Monday laggards in the sector included Capital One Financial Corp. COF , Regions Financial Corp. RF , and Genworth Financial Inc. GNW

Jefferies Group JEF �shares slipped 1.7%, pressured after S&P lowered its outlook on the brokerage house, along with that of Cantor Fitzgerald, to negative from stable.

�We believe that brokers with institutional sales and trading and investment banking businesses are likely to face a prolonged period of low profitability and possibly other financial pressures because of ongoing weakness in the financial markets,� said S&P analysts, in their report issued Friday night.

S&P noted it has already lowered the outlooks on other brokerages for similar reasons, including Goldman Sachs Group GS �and Morgan Stanley.