US STOCKS-Wall St tumbles on Fannie, Freddie worries

* Financials fall, led by Fannie, Freddie * U.S. rescue would hurt GSEs' shareholders * Jitters over possible big loss by Lehman-WSJ * Home builder sentiment stuck at record low in August * Dow down 1.6 pct; S&P 500 and Nasdaq off 1.5 pct (Updates to close)

By Steven C. Johnson

NEW YORK, Aug 18 (Reuters) - U.S. stocks sank on Monday as the prospect of more losses from the mortgage crisis hurt the shares of banks and the two biggest home finance providers, pushing all three major indexes down about 1.5 percent.

Fannie Mae (FNM.N) and Freddie Mac (FRE.N) shed more than 20 percent each after Barron's reported that the U.S. Treasury may need to bail out the home finance giants, which could wipe out shareholders and effectively nationalize the government-sponsored enterprises.

The Treasury Department responded by saying it had no plans to use its authority to backstop either of the two companies, which own or guarantee about half of outstanding U.S. mortgages. Fannie Mae shares fell to their lowest level in nearly 20 years. For details, see [ID:nWAT009920]

Shares of Lehman Brothers fell 7 percent after the Wall Street Journal reported analysts are bracing for the investment bank to report a third-quarter loss of at least $1.8 billion. For details, see [ID:nN17380162]

U.S. crude oil futures CLU8 fell 90 cents to settle at $112.87 per barrel, although investors said its price fluctuations were taking a back seat to financial concerns.

"What we're learning is that the financial crisis is far from over and that earnings estimates are probably too high," said Jim Awad, chairman of W.P. Stewart Asset Management in New York. "When oil and the stock market go down together, you know there's real reason to worry."

The Dow Jones industrial average .DJI tumbled 180.51 points, or 1.55 percent, to 11,479.39. The Standard & Poor's 500 Index .SPX lost 19.60 points, or 1.51 percent, to 1,278.60. The Nasdaq Composite Index .IXIC slid 35.54 points, or 1.45 percent, to 2,416.98.

For the Dow and the S&P, Monday was the worst day since Aug. 7, while the Nasdaq chalked up its biggest daily decline since July 28.

The Standard & Poor's Financial Index .GSPF was down 3.6 percent, reversing two consecutive sessions of gains.

Fannie Mae shares slid 22.3 percent to $6.15, while Freddie Mac shares plummeted 25 percent to $4.39, both on the New York Stock Exchange. Merrill Lynch slashed its price target on Freddie Mac to $5.75.

Adding to market anxiety was a report showing that home builder sentiment remained at a record low in August, depressed by ever-tightening lending conditions and a flood of foreclosed homes. For details, see [ID:nNAT004296]

"We are still in the throes of the credit crisis," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut. "There's risk that Fannie Mae and Freddie Mac may require capital from the government."

Lehman Brothers shares slid 7.1 percent to $15.03 on the NYSE. According to the Wall Street Journal, if losses keep piling up, Lehman could need to raise additional capital beyond the $6 billion it got in June.

Shares of Bank of America (BAC.N), the No. 2 U.S. bank, dropped 4.6 percent to $29.30 on the NYSE, while No. 1 U.S. bank Citigroup (C.N) fell 5 percent to $17.62. Both were among the top drags on the S&P.

Aluminum producer Alcoa (AA.N) was a top weight on the Dow, falling 2.2 percent to $31.11.

On Nasdaq, shares of Google (GOOG.O), the Web search company, fell 2.3 percent to $498.30.

Trading volume was light on the New York Stock Exchange, with about 984.31 million shares changing hands, sharply below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 1.68 billion shares traded, also well below last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by about 2.5 to 1 on the New York Stock Exchange, while on the Nasdaq, decliners beat advancers by a ratio of about 2 to 1.

(Additional reporting by Ellis Mnyandu; Editing by Jan Paschal)