US STOCKS-Rally fades, market falls on Countrywide woe

(Updates to midday)

By Jennifer Coogan

NEW YORK Jan 8 (Reuters) - U.S. stocks traded lower on Tuesday, after rumors of more financial problems at Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, sent housing-related shares down sharply, extinguishing a rally on Wall Street.

Shares of Countrywide plunged 24.2 percent to $5.79 on the New York Stock Exchange and touched a near eight-year low. Other big decliners were shares of mortgage bond insurers MBIA Inc (MBI.N), down 13.9 percent at $15.15, and AMBAC Financial Group Inc ABK.N, down 18.3 percent to $19.20.

Countrywide was not immediately available to comment.

"There is renewed speculation that Countrywide will declare bankruptcy or have some default action," said Al Greenberg, head floor trader at broker-dealer BNY ConvergEx Group in Chicago.

The Dow Jones industrial average .DJI was down 45.52 points, or 0.35 percent, at 12,781.97. The Standard & Poor's 500 Index .SPX was down 2.13 points, or 0.15 percent, at 1,414.05. The Nasdaq Composite Index .IXIC was down 3.15 points, or 0.13 percent, at 2,496.31.

The Dow Jones Home Construction index .DJUSHB slumped 3.8 percent to 265.02 points, after earlier falling as low as 261.33, the lowest level since October 2002.

Helping to stave off declines on the Nasdaq were shares of Starbucks Corp (SBUX.O). The coffee chain said late on Monday Howard Schultz, its founder and chairman, will take on the additional role of chief executive and the company would slow an aggressive U.S. expansion.

Starbucks stock was up 9.5 percent at $20.13.

Defensive sectors such as drug makers, food producers and utilities were the broader market's best performers, in a sign that investors are wary about the prospects for the U.S. economy.

Blue-chip drug maker Merck & Co (MRK.N) was up 3.1 percent to $59.71. Power generator Exelon Corp (EXC.N) rose 2.9 percent to $86.26. Beverage producer PepsiCo Inc (PEP.N) climbed 1.3 percent to $78.33. (Additional reporting by Doris Frankel; Editing by Leslie Adler)