Wall St dives on record oil over $123

NEW YORK (Reuters) - Stocks tumbled on Wednesday, on concerns about inflation and higher interest rates as oil jumped to a record above $123 a barrel.

Investors sold off shares of banks, home builders and companies dependent on consumer spending amid fears that rising prices will crimp demand and exacerbate fallout from the housing slump.

American International Group Inc (AIG.N) dragged the Dow and S&P 500 lower after the insurer's stock fell nearly 7 percent a day before it was expected to report a second straight quarterly loss due to its exposure to toxic mortgage investments.

Shares of Citigroup Inc (C.N), the largest U.S. bank, slid

5.4 percent, and those of rival Bank of America Corp (BAC.N), lost 3.2 percent. Credit card company American Express Co (AXP.N) dropped 4.4 percent.

Also increasing investors' concerns were comments late on Tuesday from Kansas City Fed President Thomas Hoenig, who said the U.S. central bank must be ready to raise interest rates in a timely manner, given the "troublesome" inflation outlook.

"Inflation is definitely a worry because the Fed doesn't have that much to fight inflation except by raising interest rates, and if the economy is not growing the way they want, raising interest rates all adds up to a difficult environment," said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm, based in Toledo, Ohio.

"Already you've got consumer confidence at record lows, about 20-year lows, so basically as energy prices go up practically every week, that's not going to help the way people feel about their pocketbook."

The Dow Jones industrial average slid 206.48 points, or 1.59 percent, to 12,814.35. The Standard & Poor's 500 Index fell 25.69 points, or 1.81 percent, to 1,392.57. The Nasdaq Composite Index lost 44.82 points, or 1.80 percent, to 2,438.49.

The session's losses marked the broader market's worst slide in nearly a month.

AIG shares dropped to $45.08 on the New York Stock Exchange, where Citigroup shares ended at $24.48, and those of Bank of America fell to $38. Shares of American Express were the second-biggest drag on the Dow, ending down at $48.70.

The S&P financial index .GSPF slid 3.7 percent.

On the New York Mercantile Exchange, June crude jumped $1.69, or 1.39 percent, to settle at a record $123.53 a barrel, after climbing to $123.80, a new intraday peak. The run-up occurred despite data showing a larger-than-expected buildup in U.S. crude oil inventories last week.

And as shares of energy companies had risen along with oil prices in recent sessions, investors opted to lock in profits in the energy sector, sending shares of Exxon Mobil Corp (XOM.N) down 1.4 percent at $88.82 on the NYSE.

Among consumer-oriented stocks, apparel retailer Gap Inc (GPS.N) dropped 1.8 percent to $18.24 on the NYSE, while those of Home Depot Inc (HD.N), the largest U.S. home improvement retailer, slid 2.5 percent to $28.56. The S&P retail index fell 1.6 percent.

Investors also pummeled shares of big manufacturers, heavily reliant on energy, including heavy equipment maker Caterpillar Inc (CAT.N), whose shares dropped almost 2 percent to $81.63.

Shares of plane maker Boeing Co (BA.N) declined 1.4 percent to $84.55.

Among home builders, shares of luxury home builder Toll Brothers (TOL.N) dropped 4.6 percent to $23.86 on the NYSE. The Dow Jones home construction index .DJUSHB slid 4.3 percent.

On the Nasdaq, Apple Inc APPL.O, the maker of the iPod, was the top drag, ending down 2.2 percent at $182.59.

After the closing bell, Rupert Murdoch's News Corp NWSa.N -- whose media holdings include the Fox TV network and Dow Jones, publisher of The Wall Street Journal -- posted a three-fold rise in quarterly profit and its shares gained almost 2 percent to $18.72 from an NYSE close of $18.42.

Volume was light on the New York Stock Exchange, where about 1.28 billion shares changed hands, below last year's estimated daily average of 1.90 billion. On the Nasdaq, about 2.29 billion shares traded, above last year's daily average of 2.17 billion.

Decliners outnumbered advancers by a ratio of about 5 to 2 on both the Nasdaq and the NYSE.

(Reporting by Ellis Mnyandu; Editing by Jan Paschal)