NEW YORK (Reuters) - Merrill Lynch MER.N shares dropped nearly 10 percent on Monday, leading the entire sector lower as investors fretted over credit quality and the housing sector.

The sell-off came after a rally last week that lifted many banks' shares 40 percent or more.

U.S. lawmakers passed a housing rescue package over the weekend aimed at helping struggling homeowners and shoring up confidence in mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research).

But analysts said the bill would take time to go into effect, and would not likely cure the U.S. housing crisis as the financial sector wrestles with many difficulties.

"With delinquencies and foreclosures rising sharply and house prices continuing to fall, a bottom for the housing market is not yet visible and the credit deterioration is spreading to even prime mortgage loans," said Jaime Caruana, director of the IMF's monetary and capital markets department.

Merrill's shares, which dropped as low as $24.82, were down$2.38 at $25.14 in afternoon trading. Citigroup (C.N: Quote, Profile, Research) fell 5 percent to $17.90, while Morgan Stanley (MS.N: Quote, Profile, Research) shares were down 4.3 percent at $35.16. Lehman fell 5.6 percent to $16.10.

Merrill Lynch's shares have lost more than 48 percent this year compared with the KBW Bank index, which is down 28 percent. Merrill Lynch had rallied from a low of $23.64 on July 15 to $33.81 last Wednesday.

(Reporting by Elinor Comlay, editing by Maureen Bavdek)