AIG's loss and record oil sour mood on Wall St

NEW YORK (Reuters) - Stocks fell on Friday as the price of oil set another record and concerns about the financial sector flared up again after American International Group Inc (AIG.N) reported a massive loss.

AIG's dismal results raised doubts that the end of the credit crisis was near. The world's largest insurer wrote down assets linked to subprime mortgages and said it would need to raise $12.5 billion to boost its balance sheet. Its shares fell almost 9 percent.

Oil rose above $126 a barrel, spurring concerns about inflation and that consumers will pare back their spending as higher prices at the pump cut into their discretionary income.

Pharmaceutical companies added to the gloomy picture. Mylan Inc MYL.N posted a wider loss, while Bristol Myers Squibb Co (BMY.N) fell on the threat of generic competition in Europe for its top-selling blood thinner.

"There doesn't seem to be any stopping the price of oil, it hits a record every day, and investors are starting to realize there's not going to be a quick fix to this problem," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

"Also, we're seeing the spiral playing out of declining home prices making financials' underlying collateral worth less. At best, financials will have to keep issuing new capital, which dilutes existing shares, so down the shares go."

The Dow Jones industrial average fell 120.90 points, or 0.94 percent, to close at 12,745.88. The Standard & Poor's 500 Index shed 9.40 points, or 0.67 percent, to end at 1,388.28, while the Nasdaq Composite Index slipped 5.72 points, or 0.23 percent, to 2,445.52.

For the week, all three indexes ended lower: The Dow lost 2.4 percent, the S&P 500 slid 1.8 percent and the Nasdaq tumbled 1.3 percent.

Another big financial company, Citigroup Inc (C.N), said it intends to shed roughly $400 billion of non-core assets in a bid to become more competitive.

Citi's shares fell 2.8 percent to $23.63, while AIG shares slid 8.8 percent to $40.28. AIG was the heaviest weight on both the Dow and the S&P 500.

The Nasdaq fell less than the other indexes. Its losses were kept in check by a stronger-than-expected profit from video game maker Activision Inc (ATVI.O) and upbeat broker comments on graphics company Nvidia Corp (NVDA.O). Activision shares jumped 14.2 percent to $31.64, while Nvidia's stock gained 2.6 percent to $22.53.

Despite the rise in oil, Exxon Mobil (XOM.N) was among the top drags on the S&P 500 and the Dow. Analysts said investors may be locking in profits after strong gains in recent weeks. Others noted that when the price of oil reaches a certain level, it becomes more difficult for energy companies to pass on their higher input costs to consumers.

U.S. crude oil futures hit a record $126.25 a barrel in post-settlement trading, before pulling back somewhat to $126.17. On the New York Mercantile Exchange, June crude settled at $125.96 a barrel, up $2.27.

Shares of Exxon Mobil (XOM.N) fell 0.8 percent to $88.82 on the NYSE. EOG Resources (EOG.N) shed 0.9 percent to $138.50.

Mylan stock sank 8.4 percent to $11.42, while Bristol Myers stock declined 4.7 percent to $21.71.

A record drop in U.S. imports because of slowing domestic demand took a big bite out of the U.S. trade deficit in March despite record high oil prices.

The trade gap shrank 5.7 percent in March to $58.2 billion, the Commerce Department reported; that figure was much smaller than expected.

Volume was light on the New York Stock Exchange, where about 1.10 billion shares changed hands, below last year's estimated daily average. On the Nasdaq, about 1.71 billion shares traded, below last year's daily average of 2.17 billion.

Decliners outnumbered advancers on the NYSE by a ratio of about 8 to 7, while on the Nasdaq, about seven stocks fell for every six that rose.

(Editing by Jan Paschal)