Credit worries return, driving Wall St. lower

NEW YORK (Reuters) - Stocks tumbled on Tuesday as worries about the deteriorating credit market resurfaced with news of another mortgage lending casualty.

Stocks had risen Monday and the first half of Tuesday's session, but the relief rally was cut short when American Home Mortgage Investment Corp. said it may have to liquidate assets. Shares of the mortgage lender fell 90 percent.

Investors remain sensitive to news about worsening lending conditions, which pummeled global equity markets last week. Credit market concerns pushed the S&P down 3.2 percent in July, its worst performance in three years.

In Tuesday's session, a jump in U.S. crude oil futures also unnerved investors after the September contract ended above $78 a barrel in New York in its highest settlement ever.

The relatively high quality of home loans that American Home held made investors skittish, said Sam Rahman, portfolio manager at Baring Asset Management Inc.

"That's the big news that's hitting the markets today. It is raising concerns about the whole mortgage market because American Home really didn't do anything in subprime," Rahman said.

"The fact that they're having problems trying to unload some of their debt means that the subprime issue is larger than feared," he added.

The Dow Jones industrial average slid 146.32 points, or 1.10 percent, to 13,211.99. For the month, the Dow was down 1.5 percent.

The Standard & Poor's 500 Index fell 18.64 points, or 1.26 percent, to 1,455.27. The Nasdaq Composite Index slumped 37.01 points, or 1.43 percent, to 2,546.27. For July, the Nasdaq was down 2.2 percent.

Apple Inc. helped push the Nasdaq down more than 1 percent as analysts who cover the company and options market traders cited speculation the company was either cutting production of its iPhone or iPod media player. An Apple spokeswoman could not immediately be reached for comment.

Apple shares fell 6.8 percent to $131.76.

Investment banking and brokerage shares, which had started the day higher, led the late afternoon sell-off. An index of broker-dealers' shares fell 2.7 percent.

"It's the action in the financials that has really unglued things here," said Todd Clark, managing director of trading at Nollenberger Capital Partners, in San Francisco.

General Motors Corp. had set the stage for gains earlier in the day after the automaker swung to a profit in the second quarter, its earnings handily topping Wall Street's expectations.

GM's stock climbed early, but then reversed its gains in the late afternoon to end down 0.6 percent at $32.40 on the New York Stock Exchange.

A bright spot was Sun Microsystems, whose stock gained 4.3 percent to close at $5.10 on the Nasdaq, after the high-end computer maker posted a quarterly profit as it cut costs.

Mortgage-related shares were some of the biggest percentage decliners as two mortgage insurers faced liquidity problems.

Mortgage insurer MGIC and Radian Group shares slid after MGIC disclosed it could lose most of its investment in a subprime credit joint venture the companies own.

MGIC shares fell 14.9 percent to $38.66 and Radian Group's

stock sank 16.1 percent to $33.71.

Shares of American Home Mortgage, which had been halted since Monday on the New York Stock Exchange, fell 90.1 percent to close at $1.04 after it resumed trading.

Some reassuring economic data helped lift the market earlier in the session. The core personal consumption expenditure index, the Federal Reserve's favorite inflation indicator, showed moderating price pressures, while The Conference Board said its index of consumer sentiment rose in July to its highest level in almost six years.

In another report, the National Association of Purchasing Management-Chicago said its index of business activity in the Midwest declined to 53.4 in July from 60.2 in June. That was still above the 50 level that implies expansion and both its hiring and prices components rose notably.

Trading was active on the NYSE, with about 2.21 billion shares changing hands, above last year's estimated daily average of 1.84 billion, while on Nasdaq, about 2.77 billion shares traded, above last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of about 19 to 14 on the NYSE and by 3 to 2 on Nasdaq.

(Additional reporting by Herbert Lash)