Credit, housing sink Wall St; Starbucks dives

NEW YORK (Reuters) - U.S. stocks sank on Thursday, their sixth drop in the past seven sessions, on worry that credit losses from mortgage defaults and slumping home prices would grow worse, hurting the economy and corporate profits.

Investors demonstrated a powerful aversion to risk and dumped equities in favor of the perceived safety of government bonds. U.S. Treasuries surged, sending bond yields to their lowest in more than two years.

Financial stocks took the brunt of the selling, giving back nearly all of the ground regained in Tuesday's big rally. The worst decliners among the banks included Citigroup Inc (NYSE: - ), whose stock fell more than 4 percent, and JPMorgan Chase & Co (NYSE: - ).

Shares of home funding providers Fannie Mae (NYSE: - ) and Freddie Mac (NYSE: - ) also plummeted. Chief Executive John Stumpf of Wells Fargo & Co (NYSE: - ), the No. 2 U.S. mortgage lender, told a conference that the U.S. housing slump was far from over and was the worst since the Great Depression.

Elsewhere, shares of energy companies such as Exxon Mobil Corp (NYSE: - ) dropped in sync with crude oil prices, which fell for the third day in four sessions.

Even technology shares weren't spared.

"There's just too much fear in the financials," said John O'Brien, senior vice president at MKM Partners LLC in Cleveland, Ohio. "The fear is back again that the writedowns are kind of a mystery and no one really knows what the bottom is or what the outcome is going to be."

The Dow Jones industrial average (DJI: - ) slid 120.96 points, or 0.91 percent, to finish at 13,110.05. The Standard & Poor's 500 Index ( - ) dropped 19.43 points, or 1.32 percent, to close at 1,451.15. The Nasdaq Composite Index (Nasdaq: - ) fell 25.81 points, or 0.98 percent, to 2,618.51.

AIG, CITI AND FANNIE MAE FALL

Shares of American International Group Inc (NYSE: - ) led the Dow's decliners with a 4.2 percent drop to $56.95 after a brokerage cut its price target on the insurer's stock, citing the impact of the credit turmoil.

Up until the last hour of trading, major indexes had been stuck in a narrow range, erratically seesawing from negative to little changed for much of the session.

But losses quickly mounted heading toward the close as shares of financial services companies tacked on to their declines.

Shares of Citigroup, the No. 1 U.S. bank, dropped 4.1 percent to $34.58 on the New York Stock Exchange, while shares of JPMorgan, the third-largest U.S. bank, fell 3.6 percent to close at $43.53.

Shares of Bank of America, the No. 2 U.S. bank, closed down 3.6 percent at 44.08. The S&P financial index ( - ) declined 3.1 percent.

Among the major U.S. home mortgage lenders, Wells Fargo shares dropped 3.9 percent to $31.97.

Shares of Fannie Mae, the largest U.S. home funding source, tumbled 10 percent to $43.04 on the NYSE. while shares of Freddie Mac (NYSE: - ), the No. 2 U.S. home funding company, shed 5.3 percent to $41.86.

Energy shares also weighed on the broader market as they dropped in sync with crude oil prices. Shares of Exxon Mobil ended down 2.1 percent at $84.49 on the NYSE.

U.S. crude for December delivery (CLZ7) settled down 66 cents, or 0.7 percent, at $93.43 a barrel on the New York Mercantile Exchange. The catalyst for the drop in oil prices was data showing a surprising increase in U.S. crude inventories in the latest week.

RIM DROPS AND STARBUCKS TANKS

On the Nasdaq, investors again sold shares of the tech sector's recent darlings, including BlackBerry maker Research In Motion Ltd (Toronto: - ; NasdaqGS: - ), whose stock fell 6.3 percent to end at $103.01. RIM was the biggest drag on the Nasdaq, followed by shares of iPod maker Apple Inc (NasdaqGS: - ), down 1.1 percent at $164.30.

After the bell, Starbucks Corp (NasdaqGS: - ) forecast 2008 earnings below many Wall Street estimates due to weak consumer spending, triggering a 7 percent slide to $22.42 in after-hours trading. Starbucks ended the regular session at $24.10, down 0.6 percent on Nasdaq.

On the economic front, investors grappled with mixed news, including some that pointed to increased worry about the housing slump.

Before the opening, economic reports showed a rise in core U.S. consumer prices in line with expectations, while new applications for U.S. jobless aid rose more than expected.

A report by the Federal Reserve Bank of Philadelphia showing an unexpected surge in its November index of U.S. Mid-Atlantic business conditions briefly lifted the blue-chip Dow average at midday.

But the Dow quickly gave up those gains and headed south again as components of the Philly Fed index also showed employment fell and companies' forecasts for the future dimmed.

Volume was below average on the New York Stock Exchange, with about 1.47 billion shares changing hands, below last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.34 billion shares traded, ahead of last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of more than 3 to 1 on the NYSE and by more than 2 to 1 on Nasdaq.

(Editing by Jan Paschal)