Wall Street plunges on heightened credit fears

NEW YORK (Reuters) - Stocks tumbled on Wednesday and the Nasdaq posted its biggest drop since February as a probe of the home loan industry by New York's attorney general drew in the country's biggest mortgage finance companies and Washington Mutual Inc warned the housing downturn would extend well into next year.

Indexes extended their slide late in the session, pushing the Nasdaq down 2.7 percent, its worst daily percentage decline since the market's sell-off on February 27. The S&P 500 had its biggest daily percentage drop since August.

Adding to market worries, the dollar fell to a record low against the euro after China signaled it may want to diversify its $1 trillion-plus foreign reserves.

New York Attorney General Andrew Cuomo said his office was sending subpoenas to government-sponsored mortgage financiers Fannie Mae and Freddie Mac as part of a probe of the home loan industry.

Also, Washington Mutual Inc, the largest U.S. savings and loan company, said the housing slump will persist through 2008, loan losses will rise and mortgage lending will fall to an eight-year low. Washington Mutual was also a focus of Cuomo's investigation.

"It seems every time there's any significant new headline that relates to the mortgage mess, that gets people spooked and the selling really starts to accelerate," said Eric Kuby, chief investment officer of North Star Investment Management Corp. in Chicago.

The Dow Jones industrial average sank 360.92 points, or 2.64 percent, to end at 13,300.02. The Standard & Poor's 500 Index lost 44.65 points, or 2.94 percent, to 1,475.62. The Nasdaq Composite Index slid 76.42 points, or 2.70 percent, to 2,748.76.

The Dow's drop matched its percentage decline of October 19.

Washington Mutual's stock dropped 17.3 percent to close at $20.04 on the New York Stock Exchange. Earlier, the stock plummeted to $19.72, its lowest level since July 2000.

Shares of financial services companies slid, with the S&P financial index marking its biggest daily decline in five years, as investors worried about fallout from persistent problems in the market for risky subprime mortgage debt. The S&P financial index ended the session down 5.06 percent.

Shares of Fannie Mae tumbled 10.1 percent to $49.79, while Freddie Mac lost 8.6 percent to $45.13, both on the NYSE.

Investment bank Morgan Stanley dropped 6.1 percent to $51.19.

General Motors Corp posted its biggest-ever quarterly loss, making the stock of the largest U.S. automaker among the Dow's top decliners. GM shares fell 6.1 percent to $33.95.

On the Nasdaq, shares of Microsoft Corp dropped 2.4 percent to $35.52, adding to losses triggered on Tuesday by brokerage Goldman Sachs when it dropped the software maker from its "buy" list.

U.S. crude oil prices hit a record above $98 a barrel, but ended down 33 cents at $96.37 on the New York Mercantile Exchange.

Trading was below average on the New York Stock Exchange, with about 1.66 billion shares changing hands, below last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.50 billion shares traded, ahead of last year's daily average of 2.02 billion.

Declining stocks far outnumbered advancing ones by a ratio of about 10 to 1 on the NYSE and by about 4 to 1 on Nasdaq.