Google shares fall 5.5 pct on fears of setbacks

By Eric Auchard

SAN FRANCISCO (Reuters) - Google Inc (GOOG.O) shares tumbled 5.5 percent on Monday -- their sharpest dive since the company's weak quarterly report in July -- amid investor doubts over key advertising and phone partnerships.

The stock of the Internet search leader fell $24.30 to close at $419.95 after an advertising trade group objected to Google's planned ad partnership with Yahoo Inc (YHOO.O), saying it would diminish competition in the Web search ad market.

Sanford C. Bernstein analyst Jeffrey Lindsay said other factors included "generally disappointing" reviews that have emerged in anticipation of the expected launch of phones based on Google's mobile phone software, called Android.

"There were some expectations that Android phones would be Google's big fourth-quarter news," Lindsay said. "Instead of fireworks, it may be a bit of a damp squib," he said.

Google's decline was in sharp contrast to gains in the broad market. The Dow Jones Industrials index jumped 2.6 percent, or nearly 290 points, to close at 11,510.74 on Monday.

The U.S. government's weekend seizure of troubled mortgage giants Fannie Mae and Freddie Mac also led some traders to shift into beaten down financial sector stocks and out of technology as a defensive play, Lindsay said.

"The decline could be partly trading related," he said. "Google is not supported by any good news at the minute."

It was the worst trading day for Google shares since July 18, when shares tumbled 10 percent from $533 to close at $481. After recovering somewhat in early August, the stock has deteriorated steadily since the middle of last month.

In the options market, projected volatility on all of Google options has been steadily rising since the beginning of September, traders said.

"Google shares are likely to fluctuate more over the next 30 days than they have in the past," said Interactive Brokers Group equity options analyst Rebecca Engmann Darst. "Call and put contracts are being priced higher to reflect that risk."

Technology stocks are weathering a "general undercurrent of concern" at the moment and Google is not insulated, she said.

Lindsay nonetheless rates Google shares as "outperform" relative to the broader market. Paid search, Google's core revenue-generating business, "is holding up extremely well," he said.

"Everybody was hoping for a big wow from Google. It looks less likely now," Lindsay said. However, he added: "You can never tell. It is all unsubstantiated rumor. As far as we can tell from the fundamentals there is no issue."

On Sunday, the Association of National Advertisers, which represents many of the nation's big advertisers, sent a letter to U.S. government regulators objecting to the proposed Web search advertising partnership between Yahoo and Google.

The partnership "will likely diminish competition, increase concentration of market power, limit choices currently available and potentially raise prices to advertisers for high quality, affordable search advertising," the ANA argued.