Mortgage woes, economic worry sink Wall Street

NEW YORK (Reuters) - Stocks tumbled on Thursday after a series of fresh jolts to credit markets and lackluster retail sales compounded worries the economy is near recession, driving the benchmark Standard & Poor's 500 down 2.2 percent to its lowest closing level in 18 months.

Investors stormed out of stocks and into the perceived safety of government bonds at a pace last seen in mid-January just before the U.S. Federal Reserve stepped in with an emergency interest-rate cut.

A main catalyst for the move was news that Thornburg Mortgage Inc TMA.N, a "jumbo" mortgage lender, was in default after failing to meet creditor demands for more upfront cash. Thornburg shares plunged 51.5 percent to $1.65.

A report showing that U.S. mortgage foreclosures hit a record high in late 2007 added to the gloom, sending the S&P financial index .GSPF down 3.7 percent in its sixth straight daily decline.

The S&P retail index .RLX fell 4 percent as generally weak February sales from major department store chains, including J.C. Penney Co Inc (JCP.N), overshadowed surprisingly strong sales from Wal-Mart Stores Inc (WMT.N) and other discounters. Shares of J.C. Penney shares fell 11.1 percent.

Shares of Citigroup Inc (C.N), the largest U.S. bank by assets, led financial-sector drags on the S&P 500 with a drop of 4.4 percent. Shares of insurer American International Group Inc (AIG.N) slid 3.9 percent and were the heaviest financial weight on the Dow.

"We are dealing with a market that at this point is still very, very jittery, wondering what's going to come out of the closet next," said Frederic Dickson, senior vice president and market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

"Investors seem to be moving to the safest instruments around or just diving into their fox holes. This looks pretty much like an across-the-board sell-off."

The Dow Jones industrial average .DJI slid 214.60 points, or 1.75 percent, to 12,040.39. The Standard & Poor's 500 Index .SPX tumbled 29.36 points, or 2.20 percent, to 1,304.34. The Nasdaq Composite Index .IXIC fell 52.31 points, or 2.30 percent, to 2,220.50 -- its lowest close since September 2006.

The S&P 500, which is off 16.7 percent from its record closing high in October, sank below its previous 2008 closing low set on January 22 when the U.S. Federal Reserve made an emergency interest-rate cut in its efforts to ease credit market strains and get a sputtering economy going.

Only one of the Dow's 30 components finished higher. Wal-Mart's stock rose 0.8 percent to $49.98 after the world's largest retailer beat sales estimates.

DEFAULT NOTE DEEPENS MORTGAGE WOES

Thornburg Mortgage said it had received a letter from JPMorgan Chase & Co (JPM.N) notifying it of a default after it failed to meet a margin call of about $28 million.

Adding to concerns about the financial sector, a Dutch-listed affiliate of private equity firm Carlyle Group said it has not been able to meet some margin calls and has received a notice of default.

Shares of Citigroup ended at $21.17 on the New York Stock Exchange as the largest U.S. bank by assets said it aims to cut its home loan exposure by $45 billion, reduce risk and save $200 million a year in an overhaul of its U.S. residential mortgage business.

Shares of AIG, the world's largest insurer, finished at $42.88, just a nickel above a five-year low.

Shares of JPMorgan, the No. 3 U.S. bank, ended down 3.4 percent at $37.37, while shares of Bank of America Corp (BAC.N), the No. 2 U.S. bank, fell 2.7 percent to $36.52.

The Mortgage Bankers Association said U.S. home foreclosures and the rate of homes entering foreclosure hit record highs in the fourth quarter of 2007.

DUMPING STOCKS DAY BEFORE JOBS DATA

Wall Street's sell-off came a day before the scheduled release of the government's non-farm payrolls report, expected to show the U.S. job market probably rebounded in February from the previous month's contraction, but not enough to keep the unemployment rate from rising.

Economists expect the report due on Friday to show non-farm payrolls rose by 25,000 in February, recovering from a drop of 17,000 in January. However, the estimates for February ranged widely from a fall of 110,000 to a rise of 100,000.

The price of the benchmark 10-year U.S. Treasury note jumped 22/32 to 99-6/32, while its yield slid to 3.59 percent from 3.68 percent late on Wednesday as risk-averse investors snatched up government bonds. The two-year note's yield fell below 1.50 percent for the first time since March 2004.

APPLE FALLS, AMBAC SLIDES

On the Nasdaq, shares of Apple Inc (AAPL.O), the maker of the iPhone and the iPod, were the top drag, ending down 2.9 percent at $120.93. The stock of BlackBerry maker Research In Motion Ltd (RIMM.O)(RIM.TO), down 3.8 percent at $97.92, also ranked among the heaviest weights on the Nasdaq.

Technology has been pounded by concerns that a faltering economy will hurt business and consumer spending. Shares of Intel Corp (INTC.O), which earlier this week slashed its gross margin forecast, fell 1.6 percent to $19.87.

Shares of hard-hit bond insurer Ambac Financial Group (ABK.N) fell 14.7 percent to $7.42. Ambac's slide followed concern that the company's plan to raise capital may not give it enough cash to shore up its credit-worthiness in the long run.

Banks have made a firm commitment to buy more than $500 million of Ambac's shares in a planned $1.5 billion offering -- if other investors don't buy them, according to a person briefed on the matter.

Before the opening bell, Goldman Sachs cut price targets on the shares of Ambac and another bond insurer MBIA Inc (MBI.N). Goldman also said Ambac's capital plan announced Wednesday would fall $1 billion short of an estimated requirement. MBIA shares dropped 5.5 percent to $11.60.

Shares of U.S. home finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) fell to their lowest levels in more than a decade as concerns about fallout from the housing slump rattled investors. Fannie Mae dropped 10.7 percent to $21.70 and shares of Freddie Mac tumbled 6.9 percent to $20.14.

Four mortgage real estate investment trusts, or REITs, ranked among the biggest decliners on the New York Stock Exchange, including Anworth Mortgage Asset Corp (ANH.N). Its shares plunged 29.6 percent to $6.23.

Volume was moderate on the New York Stock Exchange, where about 1.62 billion shares changed hands, below last year's estimated daily average of 1.9 billion shares. On the Nasdaq, about 2.25 billion shares traded, above last year's daily average of 2.17 billion.

Declining shares outnumbered advancing ones on the NYSE by a ratio of about 7 to 1, while on the Nasdaq, about four stocks fell for every one that rose.

(Reporting by Ellis Mnyandu; Editing by Jan Paschal)