REFILE-US STOCKS-Wall St sinks on oil's surge; financials hit

(Refiles to fix typo in paragraph 5 to read 'Hoenig')

By Ellis Mnyandu

NEW YORK, May 7 (Reuters) - U.S. stocks tumbled on Wednesday, on concerns about inflation and higher interest rates as oil jumped to a record above $123 a barrel.

Investors sold off shares of banks, home builders and companies dependent on consumer spending amid fears that rising prices will crimp demand and exacerbate fallout from the housing slump.

American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) dragged the Dow and S&P 500 lower after the insurer's stock fell nearly 7 percent a day before it was expected to report a second straight quarterly loss due to its exposure to toxic mortgage investments.

Shares of Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), the largest U.S. bank, slid more than 5 percent, and those of rival Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), slid more than 3 percent. Credit card company American Express Co (AXP.N: Quote, Profile, Research, Stock Buzz) dropped more than 4 percent.

Also increasing investors' concerns were comments late on Tuesday from Kansas City Fed President Thomas Hoenig, who said the U.S. central bank must be ready to raise interest rates in a timely manner, given the "troublesome" inflation outlook.

"Inflation is definitely a worry because the Fed doesn't have that much to fight inflation except by raising interest rates, and if the economy is not growing the way they want, raising interest rates all adds up to a difficult environment," said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm, based in Toledo, Ohio.

"Already you've got consumer confidence at record lows, about 20-year lows, so basically as energy prices go up practically every week, that's not going to help the way people feel about their pocketbook."