Stocks plummet on credit fears, bonds rally

NEW YORK (Reuters) - U.S. stocks plummeted for a second day on Friday as investors continued to recoil over credit concerns reverberating through financial markets around the world.

Worries over a possible credit crunch overwhelmed data from the government showing second-quarter U.S. growth that was the strongest in over a year.

In a scramble for safety, investors put money into the safe haven of U.S. government bonds, sending prices higher and briefly pushing benchmark Treasury yields to two-month lows.

Driving this reallocation are fears that the housing market's troubles, including a crisis in the subprime mortgage sector, may be turning into a broader credit crunch.

Credit conditions have tightened drastically in recent days as investors shy away from riskier assets, including high-yield junk bonds.

"The bad news continues to cascade out of the housing market with the growing realization that neither are problems in the subprime space 'contained' nor is the housing market anywhere close to stabilization, let alone recovery," said Richard Iley, senior economist at BNP Paribas in New York.

Stocks plunged on Friday on the credit concerns, one day after an equities sell-off that wiped out over $300 billion in the value of the S&P 500. The S&P 500 suffered its worst one-week percentage drop since September 2002.

The Dow Jones industrial average .DJI sank 208.10 points, or 1.54 percent, to end at 13,265.47. The Standard & Poor's 500 Index .SPX slid 23.71 points, or 1.60 percent, to finish at 1,458.95. The Nasdaq Composite Index .IXIC dropped 37.10 points, or 1.43 percent, to close at 2,562.24.

For the week, the blue-chip Dow average fell 4.2 percent, while the S&P 500 lost 4.9 percent and the Nasdaq dropped 4.7 percent.

In New York, crude oil ended above $77 a barrel, its second-highest settlement, as the latest economic data bolstered the belief that demand for oil would stay strong.

DOLLAR RECOVERS

The U.S. dollar rebounded sharply on Friday, after a fall in the previous session, as the trouble in the U.S. credit markets led investors to repatriate funds from overseas. The government's stronger-than-expected estimate of economic growth for the second quarter also lifted the dollar.

Worries about problems in the U.S. subprime mortgage and corporate bond markets have led investors to shun bets in riskier assets such as foreign stocks, helping buoy the dollar as money flows back into the United States.

The U.S. Dollar Index .DXY was up 0.68 percent at 80.999 from a previous session close of 80.453. The euro EUR= was down 0.74 percent at $1.3640 from a previous session close of $1.3742, while against the Japanese yen, the dollar JPY= was up 0.17 percent at 118.60 from a previous close of 118.40.

Gross domestic product, which measures the output of all goods and services within U.S. borders, grew at an annual rate of 3.4 percent in the second quarter, the Commerce Department said. That exceeded economists' forecasts for a growth rate of 3.2 percent.

BONDS AND OIL SURGE

Bonds were the session's big winners, with the Dow industrials racking up a triple-digit loss for the second day in a row.

In the U.S. Treasury bond market, the benchmark 10-year note US10YT=RR was up 9/32 in price at 97-29/32, while the yield fell to 4.77 percent from 4.79 percent late Thursday.

The 2-year U.S. Treasury note US2YT=RRwas up 4/32 at 100-7/32, with the yield at 4.51 percent. The 30-year U.S. Treasury bond US30YT=RR was up 17/32 at 97-4/32, with the yield at 4.94 percent.

Early in the day, bonds posted even larger gains that pushed the benchmark yield down as far as 4.74 percent, its lowest since mid-May.

The flight to quality in the bond market did not spill over to gold, though. COMEX gold for August delivery GCQ7 dropped $2.70 to settle at $660.10 an ounce.

Skyrocketing oil prices did not help the stock market.

U.S. light sweet crude oil CLc1 for September delivery jumped $2.07, or 2.8 percent, to settle at $77.02 per barrel, its second-highest close, on the perception that strong economic growth would keep driving demand for oil.

A year ago, NYMEX crude oil hit a record at $78.40 a barrel on tensions in the Middle East.

European and Asian markets moved in sympathy with U.S. markets. The FTSEurofirst 300 .FTEU3 index slipped 7.73 points, or 0.51 percent, to close at 1,520.06. In Tokyo, the Nikkei average .N225 sank 418.28 points, or 2.36 percent, to end at 17,283.81, its lowest close since May 1.

(Additional reporting by Caroline Valetkevitch, Herb Lash, Jennifer Ablan, David McMahon, John Parry, Gene Ramos and Frank Tang in New York)