Housing weakness woes drive stock indexes down

NEW YORK (Reuters) - Stocks slid on Tuesday as the subprime mortgage crisis escalated, undermining banking shares, while Home Depot Inc. (HD.N) and other housing-related companies lowered their outlooks.

Standard & Poor's roiled financial markets when it said it may cut ratings on $12 billion of subprime-related debt on forecasts of more delinquent and defaulted U.S. home loans.

Just before the close, Moody's Investors Service said it cut ratings on 399 mortgage-backed securities and may cut ratings on another 32, affecting $5.2 billion in debt. Moody's said the downgrades reflect higher-than-expected delinquencies in the underlying home loans.

Shares of investment banks and mortgage companies were especially hard hit while U.S. Treasury bonds benefited from the flow of funds out of riskier assets. The S&P index of financial shares .GSPF fell 2.2 percent, its worst one-day performance since mid-March.

The market extended losses in afternoon trading as a speech by Federal Reserve Chairman Ben Bernanke did not address monetary policy, leaving investors without fresh signals for the outlook on interest rates.

Home Depot Inc. (HD.N), the largest U.S. home improvement chain, cut its 2007 earnings outlook, citing fallout from the housing slump, while D.R. Horton Inc.(DHI.N), the largest U.S. home builder, forecast a third-quarter loss.

"The subprime issue is probably a bigger thing, with more developments to come," said Ryan Crane, senior portfolio manager at Stephens Capital Management in Houston. Subprime loans are made to borrowers with spotty credit histories.

The Dow Jones industrial average tumbled 148.27 points, or 1.09 percent, to end at 13,501.70. The Standard & Poor's 500 Index slid 21.73 points, or 1.42 percent, to finish at 1,510.12. The Nasdaq Composite Index lost 30.86 points, or 1.16 percent, to close at 2,639.16.

The S&P 500 and the Nasdaq had their biggest one-day percentage losses since June 7, while the Dow's drop was its worst since June 22.

Bernanke, in remarks prepared for the National Bureau of Economic Research in Cambridge, Massachusetts, stressed the importance of keeping inflation expectations under control.

"The comments suggest the Fed policy will be more of the same," said Chip Hanlon, president of Delta Global Advisors, Inc., in Huntington Beach in California.

Despite lowering its outlook, Home Depot's stock rose on news of a share-buyback plan. It edged up 0.05 percent to close at $40.25 on the New York Stock Exchange.

J.P. Morgan Chase & Co. (JPM.N) was among the biggest decliners in both the Dow and the S&P 500, falling 2.6 percent at $47.51. Citigroup Inc.(C.N) shed 1.2 percent to $51.

Shares of retailer Sears Holdings Corp. (SHLD.O) tumbled 10 percent to $154.21, making the stock the Nasdaq's biggest decliner, after it forecast lower quarterly profit.

Its drop weighed on other retailers. Wal-Mart Stores Inc (WMT.N) dropped 1.9 percent to $47.58, while shares of Target Corp (TGT.N) lost 2.9 percent to $64.81.

Shares of big home builder D.R. Horton fell 2 percent to close at $19.40 on the NYSE.

Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, dropped 3.7 percent to $35.86 on the NYSE.

The Dow Jones U.S. Home Construction index .DJUSHB fell 3.1 percent to its lowest level since October 2003.

Trading was fairly active on the New York Stock Exchange, with about 1.64 billion shares changing hands, below last year's estimated daily average of 1.84 billion.

On the Nasdaq, about 2.25 billion shares traded, above last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of about 13 to 4 on the NYSE and by 11 to 4 on Nasdaq.

(Additional reporting by Kristina Cooke and Ellis Mnyandu)