Credit, economy woes wreck holiday mood on Wall St

NEW YORK (Reuters) - U.S. stocks fell on Wednesday on signs that trouble in the housing market could worsen and further harm the economy, unnerving investors as they headed into the Thanksgiving holiday.

U.S. Treasury Secretary Henry Paulson underscored a major theme for the week, telling The Wall Street Journal the number of potential U.S. home-loan defaults will be significantly bigger in 2008 than in 2007.

Financial services companies, including Goldman Sachs Group Inc (GS.N), led the sell-off alongside economic bellwether General Electric (GE.N).

Shares of mortgage lenders, including Countrywide Financial Corp CFC.N, also tumbled while fears of even more subprime exposure at American International Group Inc (AIG.N) pushed the insurer's shares down as much as 6.58 percent.

"There just seems to be more evidence that financials are just in bigger trouble than we continue to think, and the write-offs are going to be worse than initially estimated," said Peter Dunay, investment strategist at Leeb Capital Management in New York.

The Dow Jones industrial average .DJI fell 211.10 points, or 1.62 percent, to end at 12,799.04, its lowest close since April.

The Standard & Poor's 500 Index .SPX was down 22.93 points, or 1.59 percent, at 1,416.77 -- the drop pushed the S&P into negative territory for 2007.

The Nasdaq Composite Index .IXIC was down 34.66 points, or 1.33 percent, to close at 2,562.15.

The prospect of $100-a-barrel oil hurt the shares of big manufacturers and retailers on concern about the impact of higher fuel costs on businesses and consumers. These worries were exacerbated by a survey that showed U.S. consumer sentiment fell in November to its lowest in two years, according to the Reuters/University of Michigan Surveys of Consumers.

U.S. crude oil for January delivery CLF8 hit a record $99.29 earlier on Wednesday before retreating on the New York Mercantile Exchange. NYMEX January crude fell 74 cents, or 0.8 percent, to settle at $97.29 a barrel.

Risk aversion drove investors to seek a safe haven in U.S. government bonds. The yield of the benchmark 10-year Treasury note US10YT=RR was 4.01 percent, down from 4.09 percent late on Tuesday. The note's price, which moves inversely to its yield, rose 20/32 to 101-29/32.

Earlier, the 10-year note's yield had dipped below 4 percent for the first time since September 2005.

Shares of Goldman Sachs dropped 3.7 percent to $209.50 on the New York Stock Exchange, while AIG fell 5.7 percent to close at $51.33 on the Big Board. Earlier in the day, AIG's stock tumbled to a session low at $50.86, a drop of 6.58 percent from its Tuesday close and its lowest level since April 2005. On Tuesday, an AIG shareholder sued several of the company's officials over the insurer's exposure to the subprime mortgage crisis.

"There is more of a focus now on balance sheets of financials rather than their earnings -- and that's never a good sign," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

Shares of Countrywide, the biggest U.S. mortgage lender, dropped 8.4 percent to $9.42 on the NYSE.

Among big manufacturers, General Electric (GE.N) fell 2.3 percent to $37.17, while among retailers, home improvement chain Home Depot Inc (HD.N) slipped 1.6 percent to $28.05.

Trading was thin on the NYSE, with about 1.61 billion shares changing hands, below last year's estimated daily average of 1.84 billion, while on Nasdaq, about 2.05 billion shares traded, ahead of last year's daily average of 2.02 billion.

Declining stocks outpaced advancers by a ratio of about 3 to 1 on the NYSE and by 2 to 1 on Nasdaq.

(Editing by Jan Paschal)