Bank of America Corp (BAC.N) shares fell 4.3 percent to $5.14, near a 52-week low of $5.13 touched in early October. It was the lowest closing price for the bank since March 2009.

Other banks whose shares declined were Citigroup (C.N), down 3.8 percent, and Morgan Stanley (MS.N), down 3.6 percent.

Among regional banks, Regions Financial Corp (RF.N) shares slumped more than 5 percent. The KBW Bank Index .BKX closed down 3.4 percent, a steeper decline than the broader market.

The stress tests announced by the Fed are more rigorous than those a year ago, said Jefferson Harralson, an analyst with Keefe, Bruyette & Woods Inc.

"Investors are worried that we won't see a normal resumption of dividends and share buybacks at healthier banks, and for more stressed banks, this could force them to raise capital," Harralson said.

Despite some signs of improvement in the economy and in the health of banks, investors remain worried about factors outside the United States such as the European debt crisis, said Frank Barkocy, director of research at Mendon Capital Advisors.

"There are signs that fundamentals look better, but we have to get these external clouds of concern to dissipate," Barkocy said. "That may take some time."

The cost to insure U.S. bank debt with credit default swaps jumped on Wednesday after a weak German bond sale added to fears that contagion from Europe's debt crisis could spread globally.

Bank of America's CDS costs rose the most, jumping 34 basis points to 471 basis points, or $471,000 per year to insure $10 million in debt, according to data by Markit.

In the stress tests, Bank of America and five other large banks will be measured for their ability to withstand further deterioration in the European debt crisis.

Banks will also be examined for their exposure to investor requests to buy back soured mortgage loans, Harralson noted.

"Obviously, Bank of America is the bank that stands out there," he said.

Bank of America Chief Executive Brian Moynihan has taken steps in recent months to settle claims related to mortgage-backed securities, although his most significant initiative, an $8.5 billion agreement with major institutional investors, still needs court approval.

In nearly two years as CEO, Moynihan has worked to shed assets, streamline operations and build capital to cover mortgage losses and meet new international standards. He has also suffered a number of setbacks, including the Fed's rejection of a dividend increase in March and a backlash this fall over a now-canceled debit card fee.

"I think Brian's trying to get things done and is making good progress," Barkocy said. "Sometimes he says things when he's not on firm ground, and it comes back to bite him in the behind, so to speak."

Mike Mayo, an analyst with CLSA, said the bank's management needs to improve confidence in the company after past miscues. The bank should consider shedding more assets to make it easier to manage, he said, without offering any specific examples.

"There should be no sacred cows in the analysis," Mayo said.

(Reporting by Rick Rothacker and Joe Rauch in Charlotte, N.C.; Additional reporting by Karen Brettell in New York; Editing by Maureen Bavdek, Steve Orlofsky, Gary Hill)