Wall Street plunges on credit worries

NEW YORK (Reuters) - Financial stocks dragged Wall Street sharply lower on Thursday, wiping out the previous day's Fed-fueled gains, after brokerages downgraded Citigroup and Bank of America, sparking fears of more fallout from the credit crisis.

Those concerns resurfaced with a vengeance just a day after the Federal Reserve cut benchmark interest rates and said financial market strains had eased somewhat, fueling broad gains for stocks.

By Thursday, however, investors were honing in on the U.S. central bank's signal that more rate reductions were far from a sure bet. Financial stocks fell the hardest, with American International Group (AIG.N) sliding 6 percent and Citi tumbling nearly 7 percent, its biggest daily drop in five years.

Exxon Mobil (XOM.N) added to the gloom after reporting a profit that fell short of expectations even as oil has threatened to reach the $100-a-barrel mark. The oil producer's shares fell 3.8 percent.

"It almost feels as if yesterday's action in the market was a dream and we woke up today to a stark reality -- that we're not going to be getting rid of this significant, persistent and consistent downdraft in the financials for some time," said Peter Kenny, managing director at Knight Equity Markets, in Jersey City, New Jersey.

"And even with that backdrop, it seems as if the Fed has given us what it's going to give us and we're just going to have to tough our way through this," he said.

The Standard & Poor's 500 Index .SPX dropped 40.94 points, or 2.64 percent, to 1,508.44 -- the index's biggest percentage point drop since August 9, the day French bank BNP Paribas spooked global markets by freezing three funds that had invested in U.S. subprime mortgages.

The Dow Jones industrial average .DJI sank 362.14 points, or 2.60 percent, to end at 13,567.87. The Nasdaq Composite Index .IXIC fell 64.29 points, or 2.25 percent, to 2,794.83.

The Nasdaq's and the Dow's declines were the worst since October 19, the 20th anniversary of the 1987 stock market crash.

The S&P financials index .GSPF fell the most in five years. The index ended the session down 4.6 percent.

CITI DIVIDEND CUTS?

CIBC World Markets downgraded Citigroup to "sector underperformer," citing capital concerns. CIBC analyst Meredith Whitney, who cut her 2008 and 2009 earnings estimates for the bank, said she believes Citi will be forced to sell assets, raise capital or cut its dividend to shore up its capital ratios. Credit Suisse also cut its rating on Citigroup.

Bank of America (BAC.N), the second-largest U.S. bank, was also downgraded by CIBC, which said it sees a diminished revenue outlook for the bank.

Citigroup shares dropped 6.9 percent to $38.51, while Bank of America shares shed 5.3 percent to $45.71.

American International Group (AIG.N) fell 6 percent to $59.34.

Exxon shares slid 3.8 percent to $88.50 on the NYSE.

Shares of plastic shoe maker Crocs (CROX.O) plunged 36.1 percent to $47.74 and ranked among the Nasdaq's biggest percentage losers after the company's profit outlook trailed Wall Street forecasts.

In economic news, an Institute for Supply Management report showed manufacturing growth deteriorated last month to its slowest pace since March on tightened credit conditions and the housing downturn.

Trading was fairly active on the NYSE, with about 1.75 billion shares changing hands, though it was still below last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.57 billion shares traded, ahead of last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of about 7 to 1 on the NYSE and by 4 to 1 on the Nasdaq.