US STOCKS-AIG, Wal-Mart spark sell-off on Wall Street

* AIG loss fuels fears of credit crisis fallout

* Wal-Mart sales outlook stirs consumer spending worries

* Jobless claims point to labor market weakness

* Dow down 1.9 pct; S&P 500 down 1.8 pct, Nasdaq down 1

pct (Updates to close)

By Kristina Cooke

NEW YORK, Aug 7 (Reuters) - U.S. stocks tumbled on Thursday after a big loss from insurer American International Group fueled fears of more fallout from the credit crisis and Wal-Mart's (WMT.N) cautious sales forecast added to concerns about consumer spending.

The mood in the financial sector was rattled after AIG (AIG.N), the world's largest insurer, posted its third consecutive quarterly loss of more than $5 billion as it wrote down bad mortgage-related investments. AIG's shares had their worst day in more than two decades.

Citigroup (C.N) added to the sector's unease after the bank agreed to buy back more than $7 billion of illiquid auction-rate securities to settle charges it misled investors about the debt's risk. [ID:nN07477337]. American Express' (AXP.N) shares fell after Moody's Investors Service said it may downgrade the credit card company's debt rating.

Concerns about the consumer were pushed into the spotlight after Wal-Mart Stores reported disappointing July sales results as shoppers ran out of extra tax rebate cash, damping hopes for the current back-to-school shopping season.

A U.S. government report that showed the number of people filing for first-time jobless benefits jumped to the highest level in more than six years in the latest week added to concerns about the outlook for consumer spending, as did a rise in the price of oil.

"Today we're facing a host of news reports which do not bode well for stocks prices. AIG is still in the eye of the storm and then you have Wal-Mart and jobless claims, which added to the lack of enthusiasm for stocks," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

The Dow Jones industrial average .DJI slid 224.64 points, or 1.93 percent, to close at 11,431.43, led lower by Wal-Mart and AIG.

The Standard & Poor's 500 Index .SPX fell 23.11 points, or 1.79 percent, to 1,266.08, while the Nasdaq Composite Index .IXIC dropped 22.64 points, or 0.95 percent, to 2,355.73.

The declines followed two days of gains on Wall Street.

In addition to posting a quarterly net loss, AIG reported a general deterioration in its mainstream insurance business. Analysts said the news suggested that fallout from the credit crisis, spawned by the U.S. housing slump, was far from over. AIG's shares fell 18.1 percent to $23.84.