Wall Street stumbles as subprime worries reemerge

NEW YORK (Reuters) - Stocks tumbled on Friday, wrapping up their worst week since a global sell-off in February amid fears that trouble at two Bear Stearns hedge funds may signal worse problems lie ahead for credit markets.

Investors also were rattled by news that Democrats in the U.S. Congress introduced legislation to end a tax advantage for investment fund managers as well as a jump in volatility ahead of the rebalancing of several important benchmark indexes.

The session's losses did not derail the market debut of private equity firm Blackstone Group LP (BX.N), which surged over 13 percent following the biggest U.S. initial public offering in five years.

However, the broader financial sector did not fare nearly as well. The S&P financials group .GSPF sank to a two-month low as efforts by Bear Stearns Cos. BSC.N to rescue one of two ailing hedge funds with steep losses on subprime mortgage bonds focused attention on troubles in the sector.

Investors worry Bear's problems could presage a credit crunch that would stall the takeover boom that has powered the stock indexes to all-time highs.

"This shows that the subprime market is not some funny little area, this is serious stuff and has the potential of upsetting a lot of apple carts," said Gary Shilling, president of A. Gary Shilling & Co. in Springfield, New Jersey. "There are a lot of players in this game, everybody was involved because it was a very lucrative market."

The Dow Jones industrial average .DJI was down 183.31 points, or 1.35 percent, at 13,362.53. The Standard & Poor's 500 Index .SPX was down 19.50 points, or 1.28 percent, at 1,502.69. The Nasdaq Composite Index .IXIC was down 28.00 points, or 1.07 percent, at 2,588.96.

For the week, the Dow lost 2.1 percent, the S&P shed 2 percent and the Nasdaq slipped 1.4 percent.

Bear Stearns said on Friday it will provide up to $3.2 billion in financing for a struggling hedge fund that it manages, but sources said a second fund is still working out a restructuring plan with creditors. For more details, see ID:nN22483393

Bear Stearns shares fell 1.4 percent to $143.75, capping a 4.2 percent decline on the week.

Other investment banks with large mortgage exposure also dropped. Lehman Brothers Holdings LEH.N stock fell 3.3 percent to $76.62. Merrill Lynch & Co. MER.N stock was down 3.2 percent to $84.48. The S&P financials lost 1.7 percent.

Blackstone shares surged 13.1 percent to $35.06 in its market debut as the largest private equity firm to go public, raised $4.13 billion in an initial public offering on Thursday.

On the upside, shares of Macy's Inc. (M.N) jumped on the NYSE amid speculation the department store chain may be ripe for a takeover. Macy's shares gained 6.6 percent to $41.43.

Trading was influenced by the rebalancing of the Russell 3000, a benchmark many investors use to measure the performance of their portfolios.

A total of 277 stocks are being added to and an equal number are being deleted from the Russell 3000 .RUA in the rebalancing of the broad market gauge, the Russell Investment Group said.

Trading was heavy on the NYSE, with about 2.62 billion shares changing hands, well above last year's estimated daily average of 1.84 billion, while on Nasdaq, about 2.73 billion shares traded, above last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of nearly 3 to 1 on the NYSE and by more than 2 to 1 on Nasdaq.