Stocks plummet on credit fears, bonds rally

By Chris Reese

NEW YORK (Reuters) - U.S. stocks plummeted for a second day on Friday as investors continued to recoil over credit concerns reverberating through financial markets around the world.

Worries over a possible credit crunch overwhelmed data from the government showing second-quarter U.S. growth that was the strongest in over a year.

In a scramble for safety, investors put money into the safe haven of U.S. government bonds, sending prices higher and briefly pushing benchmark Treasury yields to two-month lows.

Driving this reallocation are fears that the housing market's troubles, including a crisis in the subprime mortgage sector, may be turning into a broader credit crunch.

Credit conditions have tightened drastically in recent days as investors shy away from riskier assets, including high-yield junk bonds.

"The bad news continues to cascade out of the housing market with the growing realization that neither are problems in the subprime space 'contained' nor is the housing market anywhere close to stabilization, let alone recovery," said Richard Iley, senior economist at BNP Paribas in New York.

Stocks plunged on Friday on the credit concerns, one day after an equities sell-off that wiped out over $300 billion in the value of the S&P 500. The S&P 500 suffered its worst one-week percentage drop since September 2002.

The Dow Jones industrial average .DJI sank 208.10 points, or 1.54 percent, to end at 13,265.47. The Standard & Poor's 500 Index .SPX slid 23.71 points, or 1.60 percent, to finish at 1,458.95. The Nasdaq Composite Index .IXIC dropped 37.10 points, or 1.43 percent, to close at 2,562.24.

For the week, the blue-chip Dow average fell 4.2 percent, while the S&P 500 lost 4.9 percent and the Nasdaq dropped 4.7 percent.

In New York, crude oil ended above $77 a barrel, its second-highest settlement, as the latest economic data bolstered the belief that demand for oil would stay strong.

DOLLAR RECOVERS

The U.S. dollar rebounded sharply on Friday, after a fall in the previous session, as the trouble in the U.S. credit markets led investors to repatriate funds from overseas. The government's stronger-than-expected estimate of economic growth for the second quarter also lifted the dollar.

Worries about problems in the U.S. subprime mortgage and corporate bond markets have led investors to shun bets in riskier assets such as foreign stocks, helping buoy the dollar as money flows back into the United States.

The U.S. Dollar Index .DXY was up 0.68 percent at 80.999 from a previous session close of 80.453. The euro EUR= was down 0.74 percent at $1.3640 from a previous session close of $1.3742, while against the Japanese yen, the dollar JPY= was up 0.17 percent at 118.60 from a previous close of 118.40.

Gross domestic product, which measures the output of all goods and services within U.S. borders, grew at an annual rate of 3.4 percent in the second quarter, the Commerce Department said. That exceeded economists' forecasts for a growth rate of 3.2 percent.