(Updates with GM and trading volumes)

* Fannie, Freddie rescue plan fails to boost optimism

* Regional banks slip after IndyMac takeover by regulators

* Defensive stocks such as McDonald's cushion Dow

* S&P financials sub-index at lowest level since Oct 1998

By Walter Brandimarte

NEW YORK, July 14 (Reuters) - U.S. stocks fell on Monday as worry about the health of the U.S. banking sector after Friday's collapse of IndyMac outweighed earlier optimism over the government's plan to stabilize Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research).

On Sunday, the U.S. Treasury and the Federal Reserve said they would lend money and buy equity if needed to rescue the two pillars of the U.S. housing market, sending shares soaring early on Monday. For details, see [ID:nSP52252]

But the gains soon fizzled as analysts noted any direct government investment in Fannie Mae and Freddie Mac would further dilute existing shares -- the last thing investors want.