US STOCKS-AIG's loss and record oil sour mood on Wall St

(Updates to close)

By Kristina Cooke

NEW YORK, May 9 (Reuters) - U.S. stocks fell on Friday as the price of oil set another record and concerns about the financial sector flared up again after American International Group Inc (AIG.N: Quote, Profile, Research) reported a massive loss.

AIG's dismal results raised doubts that the end of the credit crisis was near. The world's largest insurer wrote down assets linked to subprime mortgages and said it would need to raise $12.5 billion to boost its balance sheet. Its shares fell almost 9 percent.

Oil rose above $126 a barrel, spurring concerns about inflation and that consumers will pare back their spending as higher prices at the pump cut into their discretionary income.

Pharmaceutical companies added to the gloomy picture. Mylan Inc (MYL.N: Quote, Profile, Research) posted a wider loss, while Bristol Myers Squibb Co (BMY.N: Quote, Profile, Research) fell on the threat of generic competition in Europe for its top-selling blood thinner.

"There doesn't seem to be any stopping the price of oil, it hits a record every day, and investors are starting to realize there's not going to be a quick fix to this problem," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

"Also, we're seeing the spiral playing out of declining home prices making financials' underlying collateral worth less. At best, financials will have to keep issuing new capital, which dilutes existing shares, so down the shares go."

The Dow Jones industrial average .DJI fell 120.90 points, or 0.94 percent, to close at 12,745.88. The Standard & Poor's 500 Index .SPX shed 9.40 points, or 0.67 percent, to end at 1,388.28, while the Nasdaq Composite Index .IXIC slipped 5.72 points, or 0.23 percent, to 2,445.52.