Wall St slips after run on British bank

NEW YORK (Reuters) - U.S. stocks dropped on Monday, led by financial shares, as a rush by savers to withdraw deposits at a large British mortgage lender fueled concerns that turmoil in the credit markets would spread.

Lines of angry customers outside branches of Britain's Northern Rock NRK.L stirred fears that a crisis of confidence could befall other major banks around the world.

Shares of Citigroup Inc (C.N), Bank of America Corp(BAC.N) and other leading banks and brokerages fell after shares of Northern Rock's shares plunged more than 35 percent in London.

The Nasdaq suffered the biggest drop among the major U.S. indexes after a decisive antitrust ruling against Microsoft Corp (MSFT.O) in Europe. Microsoft dropped 1.1 percent to $28.72.

For the S&P 500, Monday was the first down day after last week's four-day streak of gains.

Oil prices rose to a record for a fourth session, fanning inflation concerns a day before the Federal Reserve is expected to cut interest rates. Higher prices could constrain the Fed as it works to cushion the U.S. economy from the effects of the global credit squeeze.

The cautious mood was reinforced by comments by former Fed Chairman Alan Greenspan, who warned the risk of a recession had increased while inflationary forces loomed larger.

"The overall economy is doing OK, except if you think the credit market is going to get worse and worse. So that's the Sword of Damocles hanging over the market and the economy," said Al Goldman, chief market strategist at A.G. Edwards in St. Louis.

The Dow Jones industrial average .DJI declined 39.10 points, or 0.29 percent, to close at 13,403.42. The Standard & Poor's 500 Index .SPX slipped 7.60 points, or 0.51 percent, to finish at 1,476.65. The Nasdaq Composite Index .IXIC fell 20.52 points, or 0.79 percent, to end at 2,581.66.

The U.S. central bank is widely expected to lower rates on Tuesday to cushion the U.S. economy from the financial turmoil. The Federal Reserve has not lowered rates by more than 25 basis points at a single meeting in almost five years, but this time, some analysts believe a deeper cut is needed.

LATE SLIDE FOR E*TRADE

After the closing bell, shares of U.S. online brokerage E*Trade Financial Corp. (ETFC.O) dropped 8.5 percent to $13 as it warned that it expected full-year earnings per share to be sharply below its previous forecasts.

Several big Wall Street companies will report earnings this week that investors fear could reveal a deeper impact from the credit rout.

Lehman Brothers LEH.N, which is scheduled to report early Tuesday, was down 1.5 percent at $58.62. Morgan Stanley (MS.N) was down 1.8 percent at $64.91.

Merrill Lynch & Co Inc MER.N, which said its subprime lending unit, First Franklin Financial Corp, is cutting jobs, dropped 2.4 percent to $72.85.

Bank of America dropped 0.9 percent to $49.51 and Citigroup lost 1.3 percent to $46.03.

Oil rose $1.47 to settle at $80.57 a barrel, and hit a fresh record intraday of $80.70. The jump is a drag on the broader market because higher oil prices mean bigger expenses for consumers and business, but energy companies' shares were among the market's leading advancers. Exxon Mobil Corp (XOM.N) rose 0.7 percent to $89.26.

During the session, trading was below average on the New York Stock Exchange, with about 1.11 billion shares changing hands versus last year's estimated daily average of 1.84 billion, while on Nasdaq, about 1.56 billion shares traded, below last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of about 2 to 1 on the NYSE and by 7 to 3 on Nasdaq.