(Updates to midafternoon)
NEW YORK Aug 16 (Reuters) - U.S. stocks fell on Thursday on signs credit markets were seizing up, threatening economic growth.
An early blow to investor confidence came from Countrywide Financial Corp. CFC.N. The biggest U.S. mortgage lender said it had to draw down an entire $11.5 billion bank credit line after it was essentially shut out of other credit markets. For details, see [ID:nN16321010].
All three major indexes fell more than 10 percent below their 52-week highs from mid-July, a level recognized as a market correction by professional investors, as opposed to a signal that a bull market has ended. Bear markets are defined by a 20 percent drop in prices from their highs.
"We've got full-scale fear and panic," said David Bianco, chief U.S. equity strategist at UBS in New York.
"People are beginning to lean toward outlooks now of all the dominoes falling, that the U.S. economy slides into recession because of this credit crunch, and it has an adverse impact on the global economy and even the globally exposed sectors."
The Dow Jones industrial average .DJI was down 185.67 points, or 1.44 percent, at 12,675.80. The Standard & Poor's 500 Index .SPX was down 16.13 points, or 1.15 percent, at 1,390.57. The Nasdaq Composite Index .IXIC was down 38.35 points, or 1.56 percent, at 2,420.48.
A much weaker-than-expected reading in a gauge of economic activity in the Mid-Atlantic region added to already frayed nerves, sending stocks sliding further and triggering downside trading curbs on the New York Stock Exchange.
After the numbers from the Philadelphia Federal Reserve Bank were released, the Nasdaq index erased all its gains for the year. The S&P 500 had already gone negative for the year on Wednesday.
Industrial companies sensitive to slowing economic growth were among the biggest drags on the Dow. Shares of Caterpillar (CAT.N) fell 4.7 percent to $71.44, while Boeing (BA.N) declined 4 percent to $91.04.
Countrywide's plunge illustrated how liquidity strains have spread beyond subprime lenders to larger companies that made predominantly higher-quality home loans. Its shares fell 19 percent to $17.13 in its sixth consecutive session of declines.
Adding to the rush of negative news from the mortgage sector, First Magnus, a large U.S. mortgage lender, said it has stopped funding home loans and taking mortgage loan applications, citing the "collapse of the secondary mortgage market."
Oil companies declined after U.S. crude CLc1 fell $2.88, or 4 percent to $71.63 a barrel on fears the pounding of global financial markets could ultimately hurt demand for oil.
Exxon Mobil (XOM.N) shares fell 2.9 percent to $79.35.
Comments from economic policy-makers were also adding to markets' disarray. U.S. Treasury Secretary Henry Paulson told the Wall Street Journal he expects the financial markets' turmoil to "extract a penalty" on the growth of the U.S. economy. But St. Louis Federal Reserve President William Poole told Bloomberg that the turmoil had not undermined the economy and saw no need for a rate cut at present.
Adding gloom on the housing front was a government report that showed home construction starts fell to their lowest in nearly 10 years in July. [ID:nN15260489].
Shares of luxury home builder Hovnanian Enterprises Inc. (HOV.N) fell 10.6 percent to $11.50. Builder Lennar Corp. (LEN.N) was down 4 percent at $28.82 on the NYSE.