Wall Street plunges on credit worries

By Kristina Cooke

NEW YORK (Reuters) - Financial stocks dragged Wall Street sharply lower on Thursday, wiping out the previous day's Fed-fueled gains, after brokerages downgraded Citigroup and Bank of America, sparking fears of more fallout from the credit crisis.

Those concerns resurfaced with a vengeance just a day after the Federal Reserve cut benchmark interest rates and said financial market strains had eased somewhat, fueling broad gains for stocks.

By Thursday, however, investors were honing in on the U.S. central bank's signal that more rate reductions were far from a sure bet. Financial stocks fell the hardest, with American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) sliding 6 percent and Citi tumbling nearly 7 percent, its biggest daily drop in five years.

Exxon Mobil (XOM.N: Quote, Profile, Research, Stock Buzz) added to the gloom after reporting a profit that fell short of expectations even as oil has threatened to reach the $100-a-barrel mark. The oil producer's shares fell 3.8 percent.

"It almost feels as if yesterday's action in the market was a dream and we woke up today to a stark reality -- that we're not going to be getting rid of this significant, persistent and consistent downdraft in the financials for some time," said Peter Kenny, managing director at Knight Equity Markets, in Jersey City, New Jersey.

"And even with that backdrop, it seems as if the Fed has given us what it's going to give us and we're just going to have to tough our way through this," he said.

The Standard & Poor's 500 Index .SPX dropped 40.94 points, or 2.64 percent, to 1,508.44 -- the index's biggest percentage point drop since August 9, the day French bank BNP Paribas spooked global markets by freezing three funds that had invested in U.S. subprime mortgages.

The Dow Jones industrial average .DJI sank 362.14 points, or 2.60 percent, to end at 13,567.87. The Nasdaq Composite Index .IXIC fell 64.29 points, or 2.25 percent, to 2,794.83.