By Daniel Trotta

Obama vowed to meet a host of challenges including war, sagging confidence and an economy he said was "badly weakened" by "greed and irresponsibility," but investors were hoping for more, even with an $825 billion stimulus plan and a second $350 billion financial bailout in the works.

"People were looking for something, new plans, new hopes," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatam, New Jersey. "They didn't hear something new."

Stock prices extended losses while Obama spoke, then continued to decline after he finished as investors were disappointed they did not hear more specifics about his promises for bold and swift action, considering the depth of the recession.

The Dow closed down 4 percent, extending its 2009 slump to more than 9 percent. The S&P 500 sank 5.3 percent, a record decline on an inauguration day.

"It's very uplifting (Obama's inauguration) but I'm not sure it's sufficient. I don't really see this influencing medium-term investment decisions," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman.

"There still is a danger that we are doing too little rather than too much," he said in reference to the stimulus and financial rescue plans.

BANKS HIT AGAIN

Shares of State Street Corp, the world's biggest institutional asset manager, plummeted 59 percent after it reported billions of dollars of unrealized losses, while Citigroup, Bank of America, JPMorgan Chase and Wells Fargo all lost between 20 and 29 percent.

Europe's banking index fell to a 14-year low on fears that lenders will need more state help to raise capital.

Chrysler, a once mighty U.S. car company, surrendered a 35 percent stake to Italy's Fiat for zero cash. France weighed plans for an emergency aid package for its own battered auto industry.

Obama said the country understood it was in the midst of crisis, mentioning war, a sagging confidence and an economy that was "badly weakened, a consequence of greed and irresponsibility on the part of some."

"Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America -- they will be met," he said upon taking the oath.

Obama also hinted at greater regulation, saying "this crisis has reminded us that without a watchful eye, the market can spin out of control."

The new president was riding a wave: A CBS News/New York Times poll showed 79 percent of Americans are optimistic about the next four years.

POUND GETS POUNDED

Concerns about the British banking sector pushed the British pound below $1.39 for the first time since June 2001.

Shares of Lloyds dropped 31 percent and Barclays fell 17 percent even after Britain on Monday offered banks a second multibillion-pound lifeline in three months and gave its central bank approval to pump cash into the ailing economy because interest rates were close to zero.

European shares fell 2 percent despite a better-than-expected ZEW analyst and investor sentiment index report in Germany. The monthly poll of economic sentiment by the ZEW economic think tank rose to -31.0 from -45.2 in December.

"This is mostly an expression of hope. The (ZEW) indicator is still clearly in negative territory. Nothing is changing in terms of the 2009 recession," said Gerd Hassel, an economist at BHF-Bank.

The Bank of Canada cut its benchmark interest rate 50 basis points to a 50-year low of 1 percent, the latest effort by the world's leading economies to combat recession.

Japan reported consumer confidence plunging to a record low last month in yet another sign of deepening recession.

(Reporting by Reuters bureaus worldwide; Writing by Daniel Trotta; Editing by Brian Moss, Steve Orlofsky, Gary Hill)