Mortgage woes, economic worry sink Wall Street

By Ellis Mnyandu

NEW YORK (Reuters) - Stocks tumbled on Thursday after a series of fresh jolts to credit markets and lackluster retail sales compounded worries the economy is near recession, driving the benchmark Standard & Poor's 500 down 2.2 percent to its lowest closing level in 18 months.

Investors stormed out of stocks and into the perceived safety of government bonds at a pace last seen in mid-January just before the U.S. Federal Reserve stepped in with an emergency interest-rate cut.

A main catalyst for the move was news that Thornburg Mortgage Inc TMA.N, a "jumbo" mortgage lender, was in default after failing to meet creditor demands for more upfront cash. Thornburg shares plunged 51.5 percent to $1.65.

A report showing that U.S. mortgage foreclosures hit a record high in late 2007 added to the gloom, sending the S&P financial index .GSPF down 3.7 percent in its sixth straight daily decline.

The S&P retail index .RLX fell 4 percent as generally weak February sales from major department store chains, including J.C. Penney Co Inc (JCP.N), overshadowed surprisingly strong sales from Wal-Mart Stores Inc (WMT.N) and other discounters. Shares of J.C. Penney shares fell 11.1 percent.

Shares of Citigroup Inc (C.N), the largest U.S. bank by assets, led financial-sector drags on the S&P 500 with a drop of 4.4 percent. Shares of insurer American International Group Inc (AIG.N) slid 3.9 percent and were the heaviest financial weight on the Dow.

"We are dealing with a market that at this point is still very, very jittery, wondering what's going to come out of the closet next," said Frederic Dickson, senior vice president and market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

"Investors seem to be moving to the safest instruments around or just diving into their fox holes. This looks pretty much like an across-the-board sell-off."

The Dow Jones industrial average .DJI slid 214.60 points, or 1.75 percent, to 12,040.39. The Standard & Poor's 500 Index .SPX tumbled 29.36 points, or 2.20 percent, to 1,304.34. The Nasdaq Composite Index .IXIC fell 52.31 points, or 2.30 percent, to 2,220.50 -- its lowest close since September 2006.

The S&P 500, which is off 16.7 percent from its record closing high in October, sank below its previous 2008 closing low set on January 22 when the U.S. Federal Reserve made an emergency interest-rate cut in its efforts to ease credit market strains and get a sputtering economy going.

Only one of the Dow's 30 components finished higher. Wal-Mart's stock rose 0.8 percent to $49.98 after the world's largest retailer beat sales estimates.

DEFAULT NOTE DEEPENS MORTGAGE WOES

Thornburg Mortgage said it had received a letter from JPMorgan Chase & Co (JPM.N) notifying it of a default after it failed to meet a margin call of about $28 million.

Adding to concerns about the financial sector, a Dutch-listed affiliate of private equity firm Carlyle Group said it has not been able to meet some margin calls and has received a notice of default.

Shares of Citigroup ended at $21.17 on the New York Stock Exchange as the largest U.S. bank by assets said it aims to cut its home loan exposure by $45 billion, reduce risk and save $200 million a year in an overhaul of its U.S. residential mortgage business.