UPDATE 1-Wall Street fear gauge spikes as US stocks slump

(Updates VIX close and VIX option activity, adds trader's comment in paragraph 5)

By Doris Frankel

CHICAGO, April 20 (Reuters) - The sharp sell-off in U.S. stocks sent the Chicago Board Options Exchange Volatility Index .VIX up more than 15 percent on Monday as investors, worried over the health of the financial sector, scrambled for protection to insure their stock portfolios.

The VIX, often called Wall Street's fear gauge, vaulted to 39.18, up 15.4 percent, its largest daily percentage gain since Jan. 20.

On Friday the VIX had ended at its lowest level since late September, at 33.94.

"The VIX is up on investors' increased concerns over the state of the financial sector, resulting in raised option premiums," said Andrew Wilkinson, senior market analyst at Connecticut-based Interactive Brokers Group.

"Option premiums increased, Many option bid/ask spreads on individual stocks, particularly the financials, widened out, as volatility increased and investors sought protection in these classes," said Al Greenberg, head options trader at broker-dealer BNY ConvergEX Group in Chicago.

Bank stocks, which fell after a surge in troubled loans at Bank of America Corp (BAC.N) overshadowed its better-than-expected earnings, led the march lower in the broad market.

Shares of Citigroup Inc (C.N) fell 19.45 percent to $2.94 after Goldman Sachs analysts said credit losses at the bank continued to grow at a rapid rate and the Select Sector SPDR Financial exchange-traded fund (XLF.P) was down 10.89 percent to $9.90.