Credit jitters, surging oil hurt stocks

NEW YORK (Reuters) - Stocks fell on Wednesday, as persistent concerns about the credit crisis hurt bank shares while a rebound in oil prices and weak outlooks at some retailers raised anxieties about consumer spending.

Caterpillar, a bellwether for the U.S. economy, was among the top drags on the Dow industrials after fellow manufacturer Deere & Co (DE.N) posted disappointing earnings. Deere's results added to evidence that the malaise from the housing slump was seeping into other areas of the economy.

Financial stocks fell for a second day on fears of more credit losses. The Texas securities commissioner said regulators were close to reaching a settlement that would force some banks to repurchase billions of dollars of the now-illiquid auction-rate securities at face value.

Adding to the negative view of the financial sector, four of Wall Street's biggest investment banks were downgraded by an analyst at Merrill Lynch & Co, who said the global credit crisis has worsened and may prompt investors to try to avoid the carnage.

Retailers fell, after women's apparel retailer Liz Claiborne Inc (LIZ.N) cut its 2008 profit forecast, citing economic concerns, and Macy's Inc cut its fiscal-year earnings forecast, warning that cutbacks in consumer spending could push sales down further at its stores.

"The backdrop is quite dismal. Now that the tax rebate checks have been spent, the question is where the next infusion of cash into the economy is going to come from," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

"Financials are lower based on what appears to be an announcement coming about a settlement on auction-rate securities, which is putting more negative pressure on that sector."

The Dow Jones industrial average .DJI fell 109.51 points, or 0.94 percent, to 11,532.96, while the Standard & Poor's 500 Index .SPX slipped 3.76 points, or 0.29 percent, to 1,285.83. The Nasdaq Composite Index .IXIC was down 1.99 points, or 0.08 percent, at 2,428.62.

U.S. crude oil futures CLc1 jumped $3.44 to $116.45 a barrel after weekly government data showed an unexpectedly large decline in crude oils stocks.

Further fueling the unease, U.S. retail sales edged down in July on a big drop at auto dealers, the government said, suggesting consumers were straining to keep spending up amid rising prices.

The stock of apparel retailer Liz Claiborne fell 11.6 percent to $13.18.

Macy's, however, which spent most of the session in the red, recovered late in the day to end at $20.66, up 1.9 percent. Earlier, it had fallen almost $1 from Tuesday's close.

Investors sold off shares of major banks and other financial firms, a day after JPMorgan Chase & Co (JPM.N) said it had racked up an additional $1.5 billion in write-downs stemming from soured mortgage-related investments.

Merrill Lynch downgraded Citigroup Inc (C.N), Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc LEH.N to "underperform" and Morgan Stanley (MS.N) to "neutral". The Merrill analyst also cut his third-quarter and 2008 earnings forecasts and his price targets for those banks, as well as for JPMorgan Chase & Co (JPM.N).

Citigroup shares fell 3.9 percent to $17.81. JPMorgan shares dropped 2.7 percent to $36.91. Lehman Brothers shares fell 4 percent to $15.57, while Goldman Sachs shares shed 1.4 percent to $164.90.

Shares of Deere dropped 3.2 percent to $67.10. Caterpillar Inc (CAT.N) fell 2.8 percent to $69.83.

Another standout decliner was General Motors GM.N, down 7.6 percent at $10.26, after credit rating agency Moody's Investors Service cut its ratings on the automaker deeper into junk.

The Nasdaq outperformed the other indexes, helped by Apple Inc (AAPL.O), whose shares rose following news it will expand sales of its iPhone in an alliance with top U.S. electronics chain Best Buy (BBY.N). Apple shares shot up 1.5 percent to $179.30. A 10.8 percent jump in the shares of graphics chipmaker Nvidia Corp (NVDA.O), which late on Tuesday announced a $1 billion stock-buyback program, also helped the Nasdaq. Nvidia shares closed at $12.26.

Apart from retail sales, economic reports on Wednesday also showed a stronger-than-expected rise in July import prices.

U.S. crude oil for September delivery CLc1 gained $2.99 to settle at $116.00 a barrel after the latest U.S. inventory report showed declines in oil and gasoline stockpiles.

Trading volume was low on the New York Stock Exchange, with about 1.21 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.05 billion shares traded, also short of last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones on the NYSE by 9 to 7, while on the Nasdaq, advancers beat decliners by about 5 to 4.

(Editing by Jan Paschal)