Sept. 24 (Bloomberg) -- U.S. stocks fell for a third day on concern lawmakers will derail a White House plan to bail out banks even as Federal Reserve Chairman Ben S. Bernanke warned of ``grave threats'' facing the American economy.

The Standard & Poor's 500 Index swung between gains and losses more than 40 times as Bernanke fended off congressional criticism of the $700 billion rescue proposal and investors weighed the benefits of Warren Buffett's $5 billion investment in Goldman Sachs Group Inc.Washington Mutual Inc. tumbled 29 percent, Citigroup Inc. sank 5.2 percent and Morgan Stanley lost 11 percent.

``The concern is that this is not resolved fast enough or completely enough to restore our credit markets to health,'' said Lawrence Creatura, a fund manager at Clover Capital Management in Rochester, New York, which oversees $2.8 billion. ``If credit markets are not restored to health, the economic implications are likely to be broad and deep.''

Two stocks retreated for each that gained on the New York Stock Exchange. The S&P 500 slipped 2.35 points, or 0.2 percent, to 1,185.87. The Dow Jones Industrial Average dropped 29, or 0.3 percent, to 10,825.17. The Nasdaq Composite Index increased 2.35, or 0.1 percent, to 2,155.68, led by a rally in chipmakers.

The S&P 500, which yesterday capped its biggest two-day slump in six years, extended its decline this week to 5.5 percent. Less than 1.1 billion shares changed hands on the NYSE, about half the level of a week ago.

Washington Mutual, Citigroup

Washington Mutual, the savings and loan that put itself up for sale last week, fell 94 cents to $2.26. S&P lowered its credit rating for the second time in nine days because of the increasing likelihood that a deal may not include the whole company.

Citigroup Inc. declined for a third day, losing $1.03 to $18.96. Morgan Stanley, which along with Goldman Sachs became a bank-holding company on Sept. 21 to gain greater access to federal funds, tumbled $3.21 to $24.79.

The S&P 500 Financials Index retreated 1.5 percent, extending its decline this week to more than 11 percent. Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won't happen quickly enough to ease short-term funding constraints. The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest since January.

Home Depot Inc. fell 24 cents to $25.02. Sales of existing homes dropped 2.2 percent to an annual rate of 4.91 million units in August, topping the 1.2 percent decrease forecast by economists. The National Association of Realtors also said the median price declined 9.5 percent from August 2007.

Cyclicals Retreat

The Morgan Stanley Cyclical Index of companies considered most sensitive to economic growth slumped 1.6 percent, bringing its 3-day decline to 8 percent. Citigroup and Eaton Corp., a manufacturer of products for industrial and automotive markets, led the gauge's retreat.

``Economic activity appears to have decelerated broadly,'' Bernanke said today in remarks prepared for a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on Sept. 16. ``Stabilization of our financial system is an essential precondition for economic recovery.''

The S&P 500, the main benchmark index for U.S. equities, has erased 70 percent of the gains it posted on Sept. 18 and 19 after the bailout plan was proposed. Bernanke and Treasury Secretary Henry Paulson appeared before the congressional Joint Economic Committee and the House Financial Services Committee, following testimony yesterday before the Senate Banking Committee.

Congressional Objections

Lawmakers including Representative Paul Kanjorski, the second highest-ranking Democrat on the House Financial Services Committee, said taxpayers don't want to rescue mortgage lenders and other financial institutions viewed as responsible for the credit crisis. John McCain said the proposal won't pass Congress in its current form and urged Democratic rival Barack Obama to join him in suspending their presidential campaigns to work with lawmakers on developing a plan.

Goldman rose $7.95 to $133, extending yesterday's 3.5 percent increase. In addition to Buffett's investment, the most profitable firm on Wall Street raised $5 billion in a common stock offering.

Berkshire's Class A shares added 3.5 percent to $133,300. The preferred Goldman shares Buffett's company bought pay a 10 percent dividend and Berkshire is also getting warrants to buy $5 billion of common stock at $115 apiece, 8 percent less than Goldman's closing share price yesterday.

`Vote of Confidence'

``It's definitely a vote of confidence, one of the smartest long-term investors putting money up,'' said Ralph Shive, chief investment officer at South Bend, Indiana-based 1st Source Corp. Investment Advisors, which manages $3 billion. ``In the context of the financial bonfire, he poured a little water on the fire, which is positive in the short term.''

Buffett endorsed the bailout plan in an interview this morning on CNBC, saying it was ``absolutely necessary'' to stem an ``economic Pearl Harbor.''

``The market could not have taken another week'' like last week, Buffett told the news channel. ``It was the last thing Hank Paulson wanted to do, but there's no Plan B for this.''

American International Group Inc. fell the most in the S&P 500, losing 34 percent to $3.31. The insurer said it will pay at least 8.5 percent interest per year on its entire $85 billion credit line from the government, regardless of how much is used. The interest rates are ``hugely punitive,'' according to Rob Haines, a debt analyst at CreditSights Inc.

More Failures Predicted

More ``major'' financial institutions will collapse or lose their independence before the global credit crisis ends, said Gary Parr of Lazard Ltd. Parr advised Bear Stearns Cos., Fannie Mae, and Lehman Brothers Holdings Inc. this year. Bear Stearns and Lehman Brothers collapsed, and the U.S. government took control of Fannie Mae. Parr spoke at a Foreign Policy Association conference in New York today.

Public Service Enterprise Group Inc., owner of New Jersey's largest utility, and PPL Corp., owner of Pennsylvania's second- biggest utility, retreated more than 1 percent each after Wachovia Corp. analysts downgraded the shares on concern that lower natural gas prices will reduce earnings.

Chipmakers Gain

MEMC Electric Materials Inc. led gains in technology companies, climbing 7 percent to $31. The maker of silicon wafers for computers and telecommunications equipment was raised to ``outperform'' from ``sector perform'' at RBC Capital Markets. Micron Technology Inc., the largest U.S. maker of memory chips, rose 6.6 percent to $4.36.

Broadcom Corp. added 5.4 percent to $19.39. The U.S. Court of Appeals for the Federal Circuit upheld a verdict that Qualcomm Inc., the world's biggest maker of chips for mobile phones and Broadcom's competitor, infringed certain Broadcom patents. Qualcomm fell 1.4 percent to $45.29.

Lennar Corp. rose 16 percent to $14.77 for the biggest gain in the S&P 500. The second-largest U.S. homebuilder was upgraded to ``hold'' from ``sell'' at Argus Research, which said the company's margins have improved.

The stock led the S&P Supercomposite Homebuilding Index to a 5.2 percent advance.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: September 24, 2008 16:57 EDT