US STOCKS-Market drops on AIG's loss, higher oil

(Updates to early afternoon, changes byline)

By Kristina Cooke

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

AIG, the world's largest insurer, had to write down assets linked to subprime mortgages and said it would raise $12.5 billion in new capital to boost its balance sheet. Shares fell more than 8 percent.

Oil continued its record-breaking streak, rising above $126 a barrel, adding to concerns about inflation and that consumers will pare back their spending as higher prices at the pump cut into their disposable income.

Further painting a gloomy picture were pharmaceutical companies. 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 Plavix.

"The financials have really had another bout of weakness, and AIG is performing poorly. It doesn't seem to end really," said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

The Dow Jones industrial average .DJI was down 129.53 points, or 1.01 percent, at 12,737.25. The Standard & Poor's 500 Index .SPX was down 10.41 points, or 0.74 percent, at 1,387.27. The Nasdaq Composite Index .IXIC was down 7.23 points, or 0.29 percent, at 2,444.01.

But, Zaro said, stocks have enjoyed a run-up recently and the market's decline in the past two days could be seen as merely a pause.