Shaky economic outlook hits confidence as shares slip

NEW YORK (Reuters) - U.S. stocks dipped on Thursday as investors worried about the economic outlook after the head of the biggest U.S. mortgage company said the housing downturn could create a recession.

The remarks from Angelo Mozilo, chief executive of Countrywide Financial Corp CFC.N, quickly deflated an early rally following news that Bank of America Corp(BAC.N) had taken a $2 billion stake in the beleaguered mortgage provider.

Financial stocks were among those leading declines, with the sector bearing the brunt of dwindling investor confidence in recent weeks as fallout from the meltdown in subprime mortgages spread to other corners of the credit market.

JP Morgan Chase & Co. (JPM.N) declined 0.7 percent to close at $45.67. By the end of the session, Countrywide shares had pared most of their gains on the Bank of America deal.

Mozilo's comments about a tough housing market underscored the need for the Federal Reserve to do more, said Phil Orlando, chief equity market strategist at Federated Investors, in New York.

"The Fed has cut the discount rate and added liquidity to the markets, but those things aren't enough to turn the fundamental market around," Orlando said.

The Dow Jones industrial average .DJI inched down just 0.25 of a point to end at 13,235.88. The Standard & Poor's 500 Index .SPX slipped 1.57 points, or 0.11 percent, to 1,462.50. The Nasdaq Composite Index .IXIC shed 11.10 points, or 0.43 percent, to 2,541.70.

Mozilo, speaking on CNBC television, said the housing market was "certainly not getting better" and could push the economy into a recession. He also said the commercial paper market isn't improving.

Adding to the negative tone was a Financial Times report that a private equity-led buyout of home improvement retailer Home Depot Inc's (HD.N) wholesale supply division could be in trouble. Home Depot's shares fell 2.2 percent to $34.02.

Stocks started the day on a positive note after news late Wednesday of Bank of America's investment of $2 billion in Countrywide. Analysts said it would help shore up the mortgage lender's finances as Countrywide struggles with a liquidity crunch.

Last week, Countrywide tapped into an entire $11.5 billion credit line.

Shares of Countrywide rose 0.9 percent to end at $22.02, after rising as much as 11.1 percent early in the day on the New York Stock Exchange.

The S&P index of financial shares .GSPF fell 0.5 percent. Shares of Citigroup Inc (C.N) inched down 0.2 percent to $48.35.

Bank of America shares rose 0.4 percent to $51.83.

On the Nasdaq, shares of Apple Inc. (AAPL.O), down 1.1 percent at $131.07, led declines, giving up some of the gains from earlier in the week.

Last Friday, the Fed surprised financial markets by cutting the discount rate it charges on direct loans to commercial banks by half a percentage point to 5.75 percent to stem rising concerns about tightening credit terms in financial markets.

The federal funds rate target is the central bank's main tool for conducting monetary policy, however, and the Fed has held that rate at 5.25 percent since June 2006.

Earlier Thursday, the Federal Reserve said commercial paper outstanding fell $90.2 billion in the week to August 22 to $2.04 trillion after a drop of $91.1 billion the previous week.

Trading was lighter than average on the NYSE, with about 1.38 billion shares changing hands, down from last year's estimated daily average of 1.84 billion, while on Nasdaq, about 1.65 billion shares traded, below last year's daily average of 2.02 billion.

On the Big Board, advancing stocks just barely outnumbered declining stocks. But on the Nasdaq, the breadth was decidedly negative, with three stocks falling for every two that rose.

(Additional reporting by Ellis Mnyandu)