Markets plunge on credit woes

NEW YORK (Reuters) - Stocks tumbled on Monday as investors worried rising mortgage defaults and credit market losses will drag on the economy, fueling fears that consumers will slash spending during the vital holiday season.

The decline, led once again by big drops in financial services stocks, erased year-to-date gains for the benchmark S&P 500 index.

So far this month, the S&P 500 has fallen 9.2 percent, putting Wall Street on the verge of its worst one-month slump in five years. On a points basis, the Dow is less than 200 points away from its worst monthly slide ever.

Citigroup Inc, the largest U.S. bank, slid below the $30 mark on Monday for the first time since October 2002.

The sell-off in financials overshadowed optimism early in the session fed by reports that the holiday shopping season's unofficial kick-off on Friday was stronger than many had expected. Retailers soon lost their bid as well with the S&P retailer index falling nearly 3 percent.

RISK AVERSION

In shunning stocks and other risky assets, investors rushed to the perceived safety of U.S. government bonds, sparking the biggest bond market rally in over three years. The yield on benchmark 10-year Treasury notes, which moves inversely to their price, fell to its lowest in more than three and a half years.

"The big thing is finance is down. It is more worries about the financial crisis, and what the expectations of these big banks are," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois.

"People are trying to figure out about the slowdown, and more and more people are thinking more seriously about how severe the economic slowdown is going to be," he said.

The Dow Jones industrial average slid 237.44 points, or 1.83 percent, to close at 12,743.44. The Standard & Poor's 500 Index sank 33.48 points, or 2.32 percent, to 1,407.22. The Nasdaq Composite Index plunged 55.61 points, or 2.14 percent, to close at 2,540.99.

The slide took the indexes down more than 10 percent off their 52-week closing highs set last month. Market technicians consider a drop of this magnitude as a correction in an index or an asset.

The S&P 500 finished in the red for the year-to-date. Citigroup was among the top drags on the Dow and the S&P 500, along with Exxon Mobil Corp, whose stock declined as crude oil prices retreated.

HOUSING TROUBLE

In the latest sign of trouble for the housing industry, home financing providers Freddie Mac and Fannie Mae fell sharply after UBS downgraded the mortgage finance companies, citing increased mortgage losses and erosion of other home-loan investments.

Home builder shares also tumbled, including KB Home, whose stock ended down 9.4 percent at $19.65 on the New York Stock Exchange. The Dow Jones home construction index slid 6.6 percent.

The sell-off in shares of financial services companies coincided with a report from Goldman Sachs saying that HSBC, Europe's biggest bank, would likely need a further $12 billion in provisions for its U.S. subprime mortgages and home equity loans.

HSBC on Monday provided up to $35 billion to support its two structured investment vehicles, or SIVs. SIVs have been battered by the recent subprime-related credit turmoil.

Citigroup shares closed down nearly 6 percent at $29.80 on the New York Stock Exchange where shares of Bank of America Corp, the No. 2 U.S. bank, ended down 2.94 percent at $41.88.

Among retailers, shares of Home Depot Inc, the No. 1 U.S. home improvement retailer, slid more than 5 percent to $27.49 on the NYSE, while those of department store operator Macy's Inc plunged 6.1 percent to $28.21.

Exxon Mobil shares ended down 2.96 percent at $85.68 after U.S. crude for January delivery fell 48 cents to settle at $97.70 per barrel on the New York Mercantile Exchange.

Trading was light on the NYSE, with about 1.50 billion shares changing hands, below last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.02 billion shares were traded, matching last year's daily average.

Declining stocks outpaced advancers by a ratio of about 8 to 3 on both the NYSE and the Nasdaq.

(Additional reporting by Caroline Valetkevitch; editing by Gary Crosse)