July 15 (Bloomberg) -- Asian stocks fell, dragging the region's benchmark index to the lowest since November 2006, on concern widening credit-market losses will hurt bank earnings and slow economic growth.

Mitsubishi UFJ Financial Group Inc. and Cathay Financial Holding Co., among the region's holders of more than $50 billion of U.S. agency debt, dropped on concern about swelling losses at Fannie Mae and Freddie Mac, which the Treasury Department has pledged to support. Matsushita Electric Industrial Co. fell after Nikko Citigroup Ltd. said the company's earnings may decline. GS Engineering & Construction Corp. led South Korean builders lower on speculation higher interest rates will dent housing demand.

The MSCI Asia-Pacific Index lost 2.1 percent to 129.61 at 7:20 p.m. Tokyo time, the lowest since Nov. 20, 2006. All 10 of its industry groups fell, with financial stocks accounting for 45 percent of the drop. Seventeen stocks declined for each one that rose on the benchmark gauge.

``Freddie and Fannie are basically quasi-sovereigns and many Asian governments and banks hold their debt,'' said Leslie Phang, the Singapore-based head of investments at the private-clients unit of Schroders Plc, which oversees about $260 billion globally. ``Nobody expected them to blow up and it's shaken the foundations.''

The U.S. Treasury and Federal Reserve were forced to assemble a rescue plan for Fannie and Freddie on July 13 to stem a collapse of confidence in the two companies, which own or guarantee about half of the $12 trillion in U.S. home loans during the country's worst housing recession in 25 years.

Taiwan's Taiex Index slumped 4.5 percent, the biggest drop in the region. Japan's Nikkei 225 Stock Average declined 2 percent to 12,754.56, its lowest close since April 1. Benchmark indexes fell in the region's biggest markets.

Financial Stocks Slump

U.S. stocks dropped yesterday, sending the Standard & Poor's 500 Index 0.9 percent lower. Financial shares slumped after last week's collapse of IndyMac Bancorp Inc. spurred speculation regional banks are short of capital. S&P 500 index futures lost 0.5 percent today.

MSCI's Asian index has dropped 18 percent this year, led by financials, as the world's largest banks and securities firms reported more than $414 billion of writedowns and credit losses.

Mitsubishi UFJ, Japan's largest bank by market value, slumped 5.3 percent to 926 yen, its largest drop since March 13. Sumitomo Mitsui Financial Group Inc., the second-biggest, lost 6.1 percent to 784,000 yen, while smaller rival Mizuho Financial fell 5 percent to 511,000 yen.

The three Japanese banks held a total of 4.7 trillion yen ($44 billion) in debt securities issued by U.S. government-backed mortgage finance companies including Fannie Mae and Freddie Mac, and by U.S. federal agency Ginnie Mae, the companies said.

`Taking A Hit'

Yoshimi Watanabe, the head of Japan's financial regulator, today urged caution about holding Fannie Mae and Freddie Mac debt. Investor Jim Rogers said in an interview yesterday that the U.S. Treasury Department's plan to shore up the two companies is an ``unmitigated disaster.''

U.S. Treasury Secretary Henry Paulson proposed two days ago legislation giving the Treasury the power to make unlimited purchases of equity in Fannie Mae and Freddie Mac, and to increase their credit lines. The Fed separately agreed to let the companies borrow directly from the central bank.

Cathay Financial, Taiwan's biggest listed financial services company, dropped 7 percent to NT$58.70, its lowest close since April 2006. The company said it hasn't incurred any losses from its NT$200 billion ($6.6 billion) of securities tied to Fannie Mae and Freddie Mac.

Technology Stocks Fall

Fubon Financial Holding Co., which said it holds $676 million of the U.S. mortgage-finance companies' debt, lost 6.9 percent to NT$25.

Commonwealth Bank of Australia, the country's biggest mortgage provider, dropped 3.5 percent to A$38.75, its largest retreat since June 10. JPMorgan Chase & Co. lowered its rating to ``neutral'' from ``overweight,'' because of a ``cautionary'' outlook for the company's 2008 earnings.

``Investor confidence is taking a hit from the state of the U.S. financial system,'' said John Padilla, who helps manage the equivalent of about $3.4 billion Metropolitan Bank & Trust Co. in Manila. ``Banks will stay out of favor as long as investors don't see an end to credit-market losses in the U.S.''

Matsushita, the world's biggest consumer-electronics maker, lost 2.2 percent to 2,225 yen. The stock's rating was cut to ``hold'' from ``buy'' at Nikko Citigroup.

Higher Interest Rates?

The brokerage also lowered its recommendation on Sharp Corp., Japan's biggest maker of liquid-crystal displays, to ``sell'' from ``hold.'' The shares retreated 3.4 percent to 1,557 yen.

LG Electronics Inc., the world's fourth-largest maker of mobile phones, dropped 6.2 percent to 105,500 won in Seoul. CJ Investment & Securities Co. lowered its share-price estimate by 13 percent, citing lower earnings prospects in the third quarter.

GS Engineering, South Korea's No. 3 builder, slumped 12 percent to 89,800 won, the second-biggest tumble on MSCI's Asian index. Hyundai Engineering & Construction Co., the country's biggest builder by market value, fell 6.9 percent to 58,100 won.

South Korea's government has said it aims to limit lending to curb inflation, which last month accelerated at the fastest pace in almost 10 years.

``Investors are losing confidence'' in a property recovery, said Cho Yoon Ho, an analyst at Daishin Securities Co. in Seoul.

To contact the reporter for this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Chua Kong Ho in Shanghai at Kchua6@bloomberg.net.

Last Updated: July 15, 2008 06:22 EDT