Aug. 3 (Bloomberg) -- Stocks tumbled on evidence losses in the mortgage market may slow the economy and reduce bank profits, sending the Standard & Poor's 500 Index to its worst three-week retreat since 2003.

Bear Stearns Cos., the manager of two hedge funds that collapsed last month, helped carry financial shares to their biggest decline in five years after S&P cut the company's credit outlook. Energy shares fell to the lowest since May, led by Exxon Mobil Corp. and Chevron Corp., on speculation weaker job growth and falling oil prices will hurt earnings.

The S&P 500 erased its gain for the week, falling 39.14, or 2.7 percent, to 1433.06 in its worst day since Feb. 27. The Dow Jones Industrial Average slumped 281.42, or 2.1 percent, to 13,181.91. The Nasdaq Composite Index sank 64.73, or 2.5 percent, to 2511.25.

The sell-off exacerbated a rout last week that wiped $2.1 trillion in value from global equity markets. Shares declined in Europe, with benchmark indexes dropping in all 18 western European markets except Luxembourg. An index of market volatility in the U.S. rose to a four-year high.

``We're just seeing more and more credit problems,'' said Michael Strauss, who helps manage $40 billion at Commonfund in Wilton, Connecticut. ``It's going to be difficult for the market to trade with any confidence.''

Almost 12 stocks fell for every one that rose on the New York Stock Exchange as all 24 industry groups in the S&P 500 and all 30 members of the Dow fell.

The yield on the benchmark 10-year Treasury note fell 9 basis points, or 0.09 percentage point, to 4.68 percent. The dollar fell the most in almost a month against the euro, trading within a cent of its record low. Some 2.1 billion shares changed hands on the NYSE, 29 percent more than the three-month average.

Stocks opened the day lower after the Labor Department said employers added fewer jobs than economists forecast in July and a private report showed growth in U.S. service industries slowed.

Bear Stearns

Bear Stearns had its credit-rating outlook cut to negative by S&P on concern declining prices for mortgage-backed securities will decrease earnings. The perceived risk of owning the New York-based company's bonds rose to the highest in at least six years.

Stocks fell to their lows of the day after the firm said its return on equity in July may be close to the lowest ever and borrowing costs may slow mergers and acquisitions.

'As Bad as I've Seen It'

``I've been out here for 22 years, and this is as bad as I've seen it in the fixed-income markets,'' Chief Financial Officer Samuel Molinaro said on a conference call with analysts. He compared the crisis to 1998, when hedge fund Long-Term Capital Management collapsed and Russia defaulted on its debt. Bear Stearns fell $7.28, or 6.3 percent, to $108.35, the lowest since 2005.

The S&P 500 Financials Index fell 3.8 percent, its steepest loss since 2002, and contributed the most to the drop in the overall S&P 500. An index of brokerages and money managers in the S&P 500 has fallen 15 percent since reaching a record on May 30.

Countrywide Financial Corp., the largest U.S. mortgage lender, sank $1.77 to $25. CIT Group Inc., the biggest U.S. independent commercial finance company, lost $1.87 to $36.68. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, dropped $4.67, or 7.7 percent, to $55.78.

American Home Mortgage Investment Corp., which traded at more than $10 a week ago, sank 76 cents to 70 cents after it became the second-biggest residential lender to fail this year. The last day for most employees will be today, Chief Executive Officer Michael Strauss told the staff in an e-mailed memo obtained by Bloomberg.

Investment bankers cut off credit earlier this week, leaving the lender unable to fund at least $750 million of mortgages.

Mary Feder, a company spokeswoman, didn't return a call seeking comment.

`One of the Biggest Bubbles'

The U.S. subprime-market rout has ``got a long way to go,'' said Jim Rogers, who predicted the start of the commodities rally in 1999.

``This was one of the biggest bubbles we've ever had in credit,'' Rogers, chairman of New York-based Beeland Interests Inc., said in an interview from Hong Kong.

Credit-market losses stemming from subprime lending are leading to a tightening of funds available for investment, and helping to drive up the cost of borrowing for consumers and companies.

Union Investment Asset Management Holding AG, Germany's third-largest mutual fund manager, halted redemptions from a fund after clients withdrew $137 million in the past month. The ABS- Invest Fund, sold to institutional investors across Europe, has about 6 percent of its assets in securities related to subprime mortgage loans.

'Big Logjam of Credit'

``You've got a big logjam of credit that can't clear,'' said Brian Barish, who helps oversee about $10 billion at Cambiar Investors in Denver. ``Add a lot of fear and rumor, and it makes for a tough situation.''

Crude oil fell on concern economic growth will slow, reducing demand for gasoline and other fuels. Futures for September delivery lost $1.38, or 1.8 percent, to $75.48 a barrel and dropped 2 percent in the week. Exxon, the biggest oil company, fell $3.10 to $82.08. Chevron dropped $2.87 to $81.02.

Network Appliance Inc. dropped $5.74, or 20 percent, to $22.97. Revenue at the maker of computers that store and distribute data was $684 million to $688 million in the quarter ended July 27, short of the forecast of $745 million to $753 million, the company said today in a statement. Net income was 8 cents to 9 cents a share, instead of 14 cents to 15 cents.

GM, Take-Two

General Motors Corp., the largest U.S. automaker, fell $1.35, or 4 percent, to $32.04. Toyota Motor Corp. reported first-quarter profit that beat analysts' estimates as a weaker yen increased revenue from Corolla compacts and Camry sedans sold outside Japan. Toyota's American depositary receipts advanced 31 cents to $118.90.

Take-Two Interactive Software Inc. tumbled $2.75 to $14.16. The company said it delayed the release of the next ``Grand Theft Auto'' video game until the second quarter of fiscal 2008 and lowered its sales and profit forecast for this year.

Procter & Gamble Co. dropped 42 cents to $62.88. The largest U.S. consumer-goods company said it will spend as much as $30 billion over the next three years to buy back shares.

SanDisk Corp., the world's largest maker of flash memory cards, added 66 cents to $53.43. Samsung Electronics Co., the world's second-largest chipmaker, will shut down some of its production lines for as long as two days because of a power outage, costing the company up to $54 million in lost sales and potentially boosting sales of competitors.

Volatility Surge

The Chicago Board Options Exchange Volatility Index rose to 25.16, the highest since April 2003. Higher readings in the so- called VIX, derived from prices paid for S&P 500 options, indicate more risk in stocks.

In economic reports, the Labor Department said 92,000 jobs were added to payrolls in July compared with a forecast for an increase of 127,000 in a Bloomberg survey of economists. The jobless rate rose to 4.6 percent in July from 4.5 percent in June. Economists in a Bloomberg survey had expected it to remain at 4.5 percent.

The report said homebuilders cut payrolls by 12,000 after a 3,000 increase the previous month as the housing slump continues.

Homebuilders Slump

A gauge of homebuilders in S&P indexes dropped 5.3 percent as a group as all 16 of its members declined. D.R. Horton Inc., the second-largest U.S. builder, slipped 69 cents to $16.46. Pulte Homes, the third biggest, lost $1.40 to $18.59.

After the employment report, JPMorgan pushed back its forecast for when the Federal Reserve will change interest rates. The firm expects an increase in the middle of next year, compared with its prior prediction of around the end of this year.

The Institute for Supply Management said its non- manufacturing index dropped to 55.8 last month, from 60.7 in June. Economists in a survey had expected a reading of 59 for July. The index, which shows service industries still expanding, has averaged 56.8 in the past 12 months.

The Russell 2000 Index, a benchmark for companies with a median market value of $647 million, dropped 3.6 percent to 755.42. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 2.7 percent to 14,432.34. Based on its decline, the value of stocks decreased by $497 billion.

Today's sell-off left the S&P 500 with a 1.8 percent drop for the week and a 1 percent advance for the year. The Dow lost 0.6 percent this week and is up 5.8 percent in 2007.

American Home Mortgage Investment Corp. (AHM US)
Bear Stearns Cos. (BSC US)
Chevron Corp. (CVX US)
CIT Group Inc. (CIT US)
Countrywide Financial Corp. (CFC US)
D.R. Horton Inc. (DHI US)
Exxon Mobil Corp. (XOM US)
General Motors Corp. (GM US)
Lehman Brothers Holdings Inc. (LEH US)
Network Appliance Inc. (NTAP US)
Procter & Gamble Co. (PG US)
Pulte Homes (PHM US)
SanDisk Corp. (SNDK US)
Take-Two Interactive Software Inc. (TTWO US)
Toyota Motor Corp. (TM US)

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

Last Updated: August 3, 2007 18:32 EDT