By Jonathan Stempel

NEW YORK (Reuters) - Shares of Citigroup Inc (C.N: Quote, Profile, Research) and other financial companies suffered broad declines for a second day on Tuesday, as evidence mounted that borrowers are falling behind on more payments, the U.S. economy might be in recession, and losses on complex debt securities might worsen.

Citigroup, a Dow Jones industrial average .DJI component, closed $2.17, or 7.4 percent, lower at $27.05, while JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) fell 5 percent and Bank of America Corp (BAC.N: Quote, Profile, Research) dropped 3.8 percent. Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) slid 5.4 percent after a downgrade by Oppenheimer & Co analyst Meredith Whitney.

The Standard & Poor's Financial Index fell 4.6 percent, with all but one of its 93 components declining. Broad U.S. market indexes fell about 3 percent each.

"There is speculation that the credit crunch will get worse before it gets better," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York. "The subprime loan crisis in the United States will continue to hurt financial stocks, particularly the banks, and therefore Citigroup is once again under selling pressure."

The Institute for Supply Management said the U.S. service sector, which accounts for about two-thirds of the U.S. economy, unexpectedly fell to 41.9 in January from 54.4 in December, its largest decline ever. A reading below 50 indicates contraction. The report reinforced some investors' belief that the first recession since 2001 has arrived.

"It's basically a case of a buyer's strike," said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco, referring to financial companies. "Anyone who doubted the economy was slowing substantially or is in recession is no longer doubting it."

Separately, Fitch Ratings said it may lower its ratings for collateralized debt obligations as much as five notches.

Downgrades could reduce the value of CDOs, resulting in losses on top of the more than $100 billion of write-downs at such companies as Citigroup and Merrill Lynch & Co (MER.N: Quote, Profile, Research).