March 3 (Bloomberg) -- U.S. stocks had their biggest weekly decline since January 2003, erasing all of the year's gains, amid a global selloff spurred by concern that share prices have climbed too high during a four-year rally.

Citigroup Inc. and Bank of America Corp., the biggest U.S. financial-services companies, led the retreat after a drop in consumer confidence and rising mortgage defaults spurred concern that profit growth will be wiped out by a recession.

This week's decline ended a streak of eight monthly gains in U.S. stocks that had pushed the Standard & Poor's 500 Index to a six-year high and the Dow Jones Industrial Average to a record. The rout erased about $837 billion in market value.

``The market is focusing on the bad news,'' said Alan Gayle, who helps oversee $70 billion as senior investment strategist at Trusco Capital Management in Richmond, Virginia. ``We've seen a complete reversal on the gains we've enjoyed. It has more than reset the clock.''

The S&P 500 dropped for a second week, falling 4.4 percent to 1387.17, with all 10 of its main industry groups declining. Only 19 of its members rose for the week. The index is down 2.2 percent for the year.

The Dow average lost 4.2 percent to 12,114.10. The Nasdaq Composite Index fell 5.9 percent to 2368.

The Morgan Stanley Capital International AC World Index, which covers developed and emerging markets around the world, dropped 4.7 percent. That's the sharpest decline since September 2002, a month before the last bear market ended. This week's decline trimmed the index's advance since October 2002 to 111 percent.

Worldwide Drop

The worldwide tumble was sparked on Feb. 27 by the Chinese government's approval of a special task force to clamp down on illegal share offerings and investments with borrowed money.

Chinese stocks slumped the most in a decade the day after the announcement, while Europe's Dow Jones Stoxx 600 Index dropped 3 percent and emerging markets sank. Russian shares slid from an all-time high; Brazil's Bovespa Index lost 6.6 percent.

The Dow average's 3.3 percent drop on Feb. 27 was the worst since March 2003 and snapped the index's longest streak in more than a century without a one-day drop of at least 2 percent, according to data compiled by Birinyi Associates Inc. and Bloomberg News.

The Chicago Board Options Exchange SPX Volatility Index, an indicator that measures the rate of expected stock-market swings, surged the most ever. The one-day, 64 percent jump in the so-called VIX showed investors anticipated more risk in owning stocks.

``It's been a roller-coaster,'' said Fritz Meyer, senior investment officer at AIM Investments, which manages $150 billion in Houston.

Greenspan

Citigroup dropped 7.1 percent to $49.97 for its biggest weekly decline since December 2002. Bank of America fell 5.4 percent to $50.01.

Former Federal Reserve Chairman Alan Greenspan said on Feb. 26 that he couldn't rule out a recession this year, the Associated Press reported. St. Louis Fed Bank President William Poole said yesterday that there ``could be'' a recession, though one isn't likely.

The Commerce Department said gross domestic product last quarter rose at a 2.2 percent annual rate, compared with a 3.5 rate reported on Jan. 31. Economists in a Bloomberg News survey expected 2.3 percent.

Other data this week added to evidence that growth in the world's biggest economy is slowing. New home sales plunged and a gauge of manufacturing contracted, while orders for durable goods slid the most since October.

Home Depot

Home Depot Inc., the biggest home-improvement retailer, dropped 4.8 percent to $39.01 after the new home-sales data doused speculation that the worst of the slowdown is over. The stock's 12-day slide is the longest since the company went public in September 1981.

``We're not ready as investors to go back into housing,'' said Morris Mark, who helps manage about $500 million as president of Mark Asset Management Corp. in New York. ``The housing fundamentals, and things related to housing, are going to be under pressure for a while.''

Caterpillar Inc., the world's largest maker of earth-moving equipment, dropped 6.3 percent to $63.04. The company's earnings are sensitive to global economic growth.

The Reuters/University of Michigan's reading for consumer sentiment fell to 91.3 last month from 96.9 in January. The figure compares with an initial reading of 93.3 issued Feb. 16.

Subprime Fallout

Investors are also growing skeptical that lenders to the riskiest borrowers will achieve profit forecasts after more than 20 subprime lenders were forced to close down or sell assets since the start of 2006, and late payments on mortgages last quarter climbed to the highest in four years.

General Motors Corp. slid 11 percent to $30.62 after the automaker said it delayed releasing its annual report. The shares dropped for a 12th day, the longest losing streak since at least July 1980.

According to analysts, the postponement may signal that GM will have to repay some proceeds from last year's $14.4 billion sale of its General Motors Acceptance Corp. finance unit to a group led by Cerberus Capital Management LP because of bad home loans.

Shares of Lehman Brothers Holdings Inc. and Bear Stearns Cos., which make loans and repackage them into securities, dropped for the eighth straight day. Lehman, the fourth-biggest U.S. securities firm by market value, fell 8.8 percent this week to $72.10. Bear Stearns, the sixth biggest, lost 8.6 percent to $147.49.

Strategists Remain Bullish

Stocks rebounded on Feb. 28 after Fed Chairman Ben S. Bernanke said the economy will continue growing and the nation's largest financial institutions advised investors to keep buying stocks.

Bernanke told the House Budget Committee there is a ``reasonable possibility'' that the economy will show signs of strengthening around the middle of the year.

Darren Read and Larry Hatheway of UBS's global asset allocation team said they were using the pullback in stocks as an opportunity to increase the percentage of equities in their recommended portfolio.

``Following a long, correction-free rally in equity markets, the move appears more technical than fundamental,'' the strategists wrote.

The S&P 500 has gone four years without falling 10 percent from a recent high. The last double-digit percentage drop, a common definition of a market ``correction,'' took place from Nov. 27, 2002, to March 11, 2003. It's down 4.97 percent from its Feb. 20 close.

M&A

The four-year rally has been fueled in part by a record amount of mergers and acquisitions. TXU Corp., the biggest electricity producer in Texas, this week agreed to a $45 billion takeover offer from Kohlberg Kravis Roberts & Co. and Texas Pacific Group, the largest leveraged buyout in history. The shares jumped 11 percent to $66.50 for the best weekly gain in the S&P 500.

RadioShack Corp. climbed 8.6 percent to $24.56 for the second-best gain in the S&P 500. The third-largest U.S. electronics retailer said fourth-quarter earnings jumped 65 percent after it closed stores and eliminated jobs. The company forecast a 2007 profit of $1 to $1.20 a share, more than the average analyst estimate of 90 cents in a Bloomberg survey.

The global equity selloff has encouraged speculators to repay yen they had borrowed to buy higher-yielding assets. The Japanese currency rose to its highest in almost three months against the dollar, heading for its biggest weekly gain since December 2005.

The yen was the world's best performing currency this week as investors unwound so-called carry trades. Japan's interest rate is the lowest among industrialized nations.

U.S. 10-year Treasuries had their biggest weekly gain in five months as investors sought the safety of government debt.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: March 3, 2007 08:11 EST