Jan. 30 (Bloomberg) -- U.S. stocks fell for the first time this week on concern that bond insurers guaranteeing $2.4 trillion in securities will lose AAA credit ratings, erasing a rally spurred by the Federal Reserve's interest-rate cut.

Ambac Financial Group Inc. and MBIA Inc., the largest U.S. bond guarantors, led declines after Fitch Ratings revoked its top ranking on Financial Guaranty Insurance Co. The Standard & Poor's 500 Index had climbed as much as 1.7 percent following the Fed's decision to lower its benchmark lending rate to 3 percent from 3.5 percent to help the economy avert a recession.

``The Fed's trying to do what it can, and it looked like it excited people for a little while,'' said Barry James, who helps oversee $2.1 billion as president of James Investment Research in Dayton, Ohio. ``But things keep coming back in to show things are definitely weakening.''

The S&P 500 retreated 6.49, or 0.5 percent, to 1,355.81 and is down 7.7 percent this year. The Dow Jones Industrial Average lost 37.47, or 0.3 percent, to 12,442.83. The Nasdaq Composite Index decreased 9.06, or 0.4 percent, to 2,349. About two stocks fell for every one that rose on the New York Stock Exchange.

An analyst's report forecasting $70 billion of losses for banks should bond insurers face debt downgrades helped extend the S&P 500's worst monthly decline in five years. Financial companies erased a 90-minute, 2.7 percent rally spurred by the fastest easing of monetary policy since 1990.

Ambac, MBIA

Ambac tumbled $2.08, or 16 percent, to $10.85. MBIA declined $2.02, or 13 percent, to $13.96.

Citigroup Inc., the largest U.S. bank by assets, gave up an advance of as much as 4.4 percent to close down 3 cents at $27.88. JPMorgan Chase & Co., Morgan Stanley and Merrill Lynch & Co. also erased rallies of more than 3 percent to finish lower after the Fitch downgrade.

Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, jeopardizing ratings on securities the insurer guarantees and limiting the company's ability to generate new business.

Bond insurer credit ratings are being reassessed by Fitch, Moody's Investors Service and S&P on concern that the companies won't be able to cover losses on securities they guarantee.

$70 Billion at Stake

The S&P 500 Financials Index of 92 companies had declined before the Fed's decision after Oppenheimer & Co. analyst Meredith Whitney said banks may write down an additional $70 billion if bond insurers lose their top credit ratings. Whitney, who last year correctly predicted that credit-market losses would prompt Citigroup to cut its dividend, downgraded Merrill to ``underperform'' from ``perform'' and said it could face writedowns of as much as $10 billion.

Merrill Chief Executive Officer John Thain said today that the firm's potential maximum losses from bond insurers are only $3.5 billion.

Financial shares may slide again tomorrow. S&P said after the market's close that it lowered or may cut ratings on $534 billion of residential mortgage securities and collateralized debt obligations. The downgrades may extend losses at the world's banks to more than $265 billion and have a ``ripple impact'' on the broader financial markets, S&P said.

The Fed reduced its benchmark interest rate for the second time in nine days and indicated its willingness to do so again to prevent a U.S. recession. The cumulative reduction in rates since Jan. 22 is the fastest easing of monetary policy since 1990.

`Retest the Lows'

``Most areas of the economy are slowing,'' said Bruce McCain, head of investment strategy at Key Private Bank in Cleveland, which manages $30 billion. ``Rate cuts usually take about 12 months to take a real effect on the economy. We still are going to have to retest the lows'' that stocks fell to earlier this month before the market rallies, he said.

Profits excluding some items at the 239 companies in the S&P 500 that reported quarterly results so far have declined 33 percent on average, dragged down by losses at financial firms such as Citigroup and Merrill. Earnings at all companies in the S&P 500 probably fell 18 percent on average, the biggest drop since 2001, according to analysts' estimates compiled by Bloomberg.

Baker Hughes Inc. dropped $6.17 to $67.27. The world's third-largest oilfield-services provider reported a smaller-than- estimated 23 percent increase in profit as drilling for natural gas in North America slowed.

Sprint, Merck

Sprint Nextel Corp. fell 44 cents to $10.36. Deutsche Bank AG cut its share-price estimate for the third-biggest U.S. wireless carrier by 35 percent and said speculation of a deal with Clearwire Corp. was ``premature.'' Sprint shares rose 8.3 percent yesterday after the Wall Street Journal reported that the company had restarted talks with Clearwire to combine wireless networks. Clearwire lost $2.85 to $12.49.

Merck & Co. declined $1.32 to $46.69. The third-largest U.S. drugmaker lost $1.63 billion in the fourth quarter and reported sales of the Gardasil cervical cancer vaccine that were lower than analysts' estimates.

Centex Corp. fell $2.60 to $26.40. The second-largest U.S. homebuilder posted a net loss of $7.94 a share in its fiscal third quarter after a slump in demand dragged down property values. Centex was projected to report a net loss of $1.13 a share, according to the average of analysts' estimates compiled by Bloomberg.

``We'll probably see earnings lower into '08,'' David Dreman, who oversees $20 billion at Jersey City, New Jersey-based Dreman Value Management LLC, said in an interview with Bloomberg Television. ``This could be a very volatile year.''

Boeing Co. climbed $1.91, or 2.4 percent, to $82.87 for the top gain in the Dow average. The world's second-biggest commercial-airplane maker raised its annual profit forecast by 10 cents a share to as much as $5.85.

`Weak and Teetering'

The Commerce Department said today economic growth slowed to an annual rate of 0.6 percent from October to December, half what economists had forecast and less than the third quarter's 4.9 percent. The Fed's preferred inflation gauge, which strips out food and energy costs, rose at a 2.7 percent pace, the most since the second quarter of 2006.

``The U.S. economy is weak and teetering, global capital markets are struggling right now and the system needs to be fixed,'' said Kevin Rendino, who helps oversee $16 billion as senior fund manager at BlackRock Inc. in Plainsboro, New Jersey. ``The Fed is doing whatever it can to fix it.''

The S&P 500 has advanced 3 percent on average during the first six months of similar Fed easing cycles and posted a 14 percent average gain during the entire cycle, Bespoke Investment Group LLC wrote in a research note. The S&P 500 has dropped about 6.2 percent since Aug. 17, when the Federal Open Market Committee unexpectedly cut the so-called discount rate by 0.5 percentage point to 5.75 percent.

Volatility Rises

Volatility has climbed this year as stocks slumped. The Chicago Board Options Exchange Volatility Index, a gauge for S&P 500 options prices, last week surged as much as 38 percent to 37.57, the highest level since October 2002. The so-called VIX added 1.1 percent to 27.62 today.

Intraday swings in the Dow industrials have averaged 277 points this month, compared with 96 points a year ago. The Dow average swung as much as 275 points today.

Companies added 130,000 workers in January, a private report based on payroll data showed. The increase in the ADP Employer Services gauge was bigger than economists had forecast, while following a gain of 37,000 in December that was less than half the average monthly increase of the past five years.

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

Last Updated: January 30, 2008 19:03 EST