Aug. 30 (Bloomberg) -- U.S. stocks resumed their summer sell-off after Lehman Brothers Holdings Inc. said rising credit costs may reduce bank profits and Freddie Mac predicted the housing market will keep languishing.

Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co., Wall Street's biggest securities firms, led the Standard & Poor's 500 Index to its third decline this week. Freddie Mac fell the most in four years after the second-biggest U.S. mortgage finance company said the housing slump cut profit by 45 percent.

The S&P 500 decreased 6.12, or 0.4 percent, to 1,457.64. The Dow Jones Industrial Average declined 50.56, or 0.4 percent, to 13,238.73. The Nasdaq Composite Index rose 2.14, or 0.1 percent, to 2,565.3, extending its gain after the biggest rally in a year.

Lehman reduced its earnings estimates for investment banks two days after Merrill Lynch analysts slashed their projections. Financial shares in the S&P 500, which comprise about one-fifth of the index's value, are headed for their worst quarter in five years amid concern that higher borrowing costs spurred by mortgage defaults by the riskiest borrowers will erode earnings.

``We don't have a perfect idea of how deep or widespread the subprime issue will be,'' said John Forelli, who helps oversee $7 billion at Independence Investment LLC in Boston. ``Investment banks are caught in the crosshairs of this financial crisis.''

The Commerce Department said today that the U.S. economy expanded in the second quarter at the fastest pace in more than a year as exports surged and business spending accelerated.

Gross domestic product growth may slow for the rest of the year because the cost of borrowing grew this month, economists said. The Federal Reserve has said that risks to growth have ``increased appreciably.''

`Closely Monitoring'

Growth was revised up to a 4 percent annual rate. The median forecast of economists polled by Bloomberg News was 4.1 percent. The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate, the smallest gain in four years.

Investors will look for further clues on the outlook for monetary policy tomorrow when Fed Chairman Ben S. Bernanke gives the opening speech at the Kansas City Fed Bank's annual symposium in Jackson Hole, Wyoming.

Almost two stocks fell for every one that gained on the New York Stock Exchange. Some 1.3 billion shares changed hands on the Big Board, 26 percent less than the three-month daily average.

The S&P 500 climbed 2.2 percent yesterday after dropping 2.4 percent the previous day. A back-to-back gain and loss of 2 percent or more has occurred only 35 times since 1945, according to Bespoke Investment Group LLC. Since June 21, the S&P 500 has fallen 4.2 percent.

Goldman, Morgan Stanley

Goldman, the largest securities firm by market value, dropped $2.34 to $171.38 today. Morgan Stanley, the second biggest, fell $1.05 to $60.16. Merrill, the No. 3 securities firm, declined 93 cents to $72.18. Lehman, the biggest U.S. underwriter of mortgage bonds, slipped 66 cents to $53.77.

``Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' Roger Freeman, an analyst at Lehman in New York, wrote in a report published today. The brokerage has ``limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October.''

Freddie Mac retreated $3.18, or 5 percent, to $60.07 after saying second-quarter profit declined as the company set aside $320 million for losses as the housing slump deepens. Freddie Mac, which owns or guarantees about one in every five U.S. residential mortgages, anticipates the slump may last for 18 months, Chief Executive Officer Richard Syron said on a conference call with analysts.

Fannie Mae

Fannie Mae, the largest source of money for U.S. home loans, dropped $2.36 to $63.40.

The Office of Federal Housing Enterprise said today that U.S. house prices in the second quarter rose at the slowest pace in a decade as lenders tightened requirements to get mortgages.

Financial shares in the S&P 500 fell 1.1 percent as a group and contributed the most to the broader index's decline. The measure has tumbled 8.2 percent since the end of June.

Wal-Mart Stores Inc. dropped 87 cents, or 2 percent, to $43.32 for the biggest retreat in the Dow industrials. Merrill said ``erosion'' in the profitability of the world's largest retailer's U.S. stores may accelerate over the next few years as the domestic economy slows. Merrill cut Wal-Mart's rating, becoming the first among analysts tracked by Bloomberg to advise investors to sell the stock.

Technology Shares Gain

Technology companies in the S&P 500 advanced 0.4 percent as a group for the only gain among 10 industries.

Cisco Systems Inc., the world's largest maker of networking equipment, gained 43 cents to $31.43. Sanford C. Bernstein & Co. wrote in a note today that Cisco is poised to grow at a faster rate than other large technology companies. The brokerage expects the shares to climb to $39 in the next 12 months.

Novell Inc. increased 54 cents, or 8 percent, to $7.33 for the top gain in the S&P 500. Third-quarter revenue grew 2.9 percent to $243.1 million, the second straight quarter of sales growth, beating the $233.6 million average estimate compiled by Bloomberg.

Research In Motion Ltd. climbed $1.05 to $82.87 on speculation the maker of the BlackBerry e-mail device may be acquired by Microsoft Corp., traders said.

``We're hearing the same rumor everyone else is, the Microsoft and RIM rumor,'' said Steve Sachs, head of trading at Rydex Investments in Rockville, Maryland. ``I can't even count the number of times we've heard that over the last three years.''

Courtney Flaherty, a spokeswoman for Waterloo, Ontario-based Research In Motion, wasn't available. Microsoft spokesman Bill Cox declined to comment.

Motorola Rises

Motorola Inc. rose 28 cents to $16.75 after Lehman analysts recommended shares of the world's second-biggest maker of mobile phones, saying handset sales will increase in the third quarter.

``Everyone's looking for technology to be the positive driver for the remainder of the year and take the market forward,'' said Clarence Woods Jr., chief equity trader with Baltimore-based MTB Investment Advisors, which manages $12 billion.

The Russell 2000 Index, a benchmark for companies with a median market value of $639 million, declined 0.5 percent to 783.11. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, lost 0.4 percent to 14,677.24. Based on its drop, the value of stocks decreased by $71.3 billion.

Cisco Systems Inc. (CSCO US)
Fannie Mae (FNM US)
Freddie Mac (FRE US)
Goldman Sachs Group Inc. (GS US)
Lehman Brothers Holdings Inc. (LEH US)
Merrill Lynch & Co. (MER US)
Morgan Stanley (MS US)
Motorola Inc. (MOT US)
Novell Inc. (NOVL US)
Research In Motion Ltd. (RIMM US)
Wal-Mart Stores Inc. (WMT US)

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

Last Updated: August 30, 2007 17:30 EDT