October 14, 2010 / 6:54 PM / 7 years ago

US STOCKS-Banks drag Wall St lower over foreclosure uncertainty

* Banks slide on worries about nationwide mortgage probe

* Initial jobless claims rise more than expected

* Apollo Group tumbles, for-profit sector follows

* Dow off 0.5 pct, S&P down 0.8 pct, Nasdaq off 0.6 pct

* For up-to-the-minute market news see [STXNEWS/US] (Updates to late afternoon, changes byline)

By Rodrigo Campos

NEW YORK, Oct 14 (Reuters) - Bank shares led the Dow and the S&P 500 lower on Thursday, reflecting investors' fears of how a nationwide probe into the mortgage industry's foreclosure practices might affect earnings.

JPMorgan Chase & Co (JPM.N) and Bank of America (BAC.N), down 4 percent and 6 percent respectively, ranked among the heaviest weights on the Dow, while the KBW bank index .BKX dropped 3.6 percent.

All 50 U.S. states are investigating the mortgage industry,and investors are growing concerned it will hit the battered housing market and economy, imperiling the strong advances in stocks over the past 5 weeks.[ID:nN14114592].

"We had started looking (forward) to normalized bank earnings in 2012 or 2011," said Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles.

"The foreclosure issue is clearly putting into question what those normalized earnings are going to be, and also creates some some instability in the housing market, which is key for consumers."

The Dow Jones industrial average .DJI dropped 56.19 points, or 0.51 percent, to 11,039.89. The Standard & Poor's 500 Index .SPX fell 9.81 points, or 0.83 percent, to 1,168.29. The Nasdaq Composite Index .IXIC lost 15.49 points, or 0.63 percent, to 2,425.74.

Apollo Group's APOL.O plunge dragged the for-profit education stocks to 6-week lows after the sector bellwether withdrew its 2011 outlook and forecast sharp falls in new student enrollments..

Apollo shares sank 25.5 percent to $36.87 and led declines in the Nasdaq 100 .NDX.

The U.S. dollar's slide limited stocks' losses, as a weaker greenback puts a bid under commodities and other assets denominated in the U.S. currency.

New claims for jobless benefits unexpectedly rose in the latest week. The data reinforced the view that the Federal Reserve will engage in another round of money printing to support a sluggish economic recovery. [ID:nN14277059].

The U.S. dollar fell to a 2010 low against a basket of major currencies .DXY after Singapore expanded its currency trading band, driving the Singapore dollar to a record high.

The prospect of additional Fed stimulus has created an inverse correlation between the dollar and stocks, with a drop in the greenback sparking a move into equities.

Google Inc (GOOG.O) shares slid 1 percent to $537.62 and helped pressure the Nasdaq as investors await the release of the Internet giant's earnings after the closing bell.

Traders in Google options looked they were pricing in a potential post-earnings move of just over 4 percent in the stock's price, which is down from the average swing of 6 percent over the past four quarters. [ID:nN14104358].

But a bright spot was provided by Yahoo Inc YHOO.O, up 4.2 percent at $15.89 after a source said several private equity firms had approached Internet and media companies, including News Corp (NWSA.O) and AOL Inc AOL.N, to gauge their interest in buying the company. [ID:nN13281610]. (Reporting by Rodrigo Campos; Additional reporting by Ryan Vlastelica; Editing by Jan Paschal)

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