Wall St stocks drop as consumers cinch belts

NEW YORK (Reuters) - Stocks fell sharply on Friday, capping a third consecutive weekly decline, on a warning by American Express Co (AXP.N) of mounting credit-card defaults and a slowdown in consumer spending.

Worries about consumer belt-tightening hit stocks from across the board -- from fast-food chain McDonald's Corp (MCD.N) to Tiffany & Co (TIF.N). The luxury jeweler cut its profit forecast on weak consumer spending.

Evidence that individuals reined in their usual holiday spending last year came from SpendingPulse, a private retail data service, which said spending, excluding sales of gasoline and autos, fell 0.7 percent in December.

"Consumers were not expected to spend much and they spent even less than that," said Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego. "The markets right now are very much in recession mentality."

The Dow Jones industrial average .DJI ended down 246.79 points, or 1.92 percent, at 12,606.30. The Standard & Poor's 500 Index .SPX fell 19.31 points, or 1.36 percent, to 1,401.02. The Nasdaq Composite Index .IXIC dropped 48.58 points, or 1.95 percent, at 2,439.94.

The S&P 500's year-to-date decline of 4.59 percent makes it the fourth-worst start to any year in the history of the benchmark, according to Howard Silverblatt, senior index analyst at Standard & Poor's in New York.

For the week, the Dow shed 1.5 percent, the S&P lost 0.8 percent and the Nasdaq declined 2.6 percent.

American Express shares dropped more than 10 percent to $44 after the credit card company gave a profit warning. It was the steepest plunge in the company's shares since the first day the stock markets reopened following the September 11, 2001 attacks.

Shares of McDonald's skidded 6.6 percent to $54.32. Tiffany stock shed 11.2 percent to $35.80.

Also on Friday, Bank of America Corp (BAC.N) said it would buy battered mortgage lender Countrywide Financial Corp CFC.N for $4 billion in stock in a transaction that could help avert one of the biggest collapses from the U.S. housing crisis.

Before the deal was announced, Bank of America had a roughly $1.3 billion paper loss on the $2 billion it had already injected into Countrywide.

Moody's Investors Service said it may cut Bank of America's credit rating. Shares of Countrywide slid 18.3 percent to $6.33. Bank of America set the takeover terms at a discount to Countrywide's share price at Thursday's close. Bank of America's shares fell 2 percent to $38.50.

Elsewhere in the financial sector, AllianceBernstein Holding LP (AB.N) shares dropped nearly 10 percent to $69.70 after the money manager said it sees lower 2007 earnings per shares, partly due to lower hedge fund fees.