July 31 (Bloomberg) -- U.S. stocks fell after troubled American Home Mortgage Investment Corp. said it lacks cash to fund new loans and traders speculated Apple Inc. will cut production of its widely touted iPhone. The Standard & Poor's 500 Index posted its biggest monthly decline in three years.

Lehman Brothers Holdings Inc., Bear Stearns Cos. and Goldman Sachs Group Inc. led the brokerage industry to a 10-month low because the prospect of American Home liquidating assets threatened to depress the value of mortgage securities traded on Wall Street. The concern that Apple overestimated demand for its unique mobile telephone helped send the S&P 500 Information Technology Index to its biggest drop since March.

The Dow Jones Industrial Average erased a gain of 140 points and fell 146.32, or 1.1 percent, to 13,211.99. The S&P 500 slipped 18.64, or 1.3 percent, to 1455.27. The Nasdaq Composite Index slumped 37.01, or 1.4 percent, to 2546.27.

``Anyone invested in the market is struggling because their portfolio is underperforming and they are wondering how long this is going to last,'' said Sam Rahman, who oversees $1.3 billion as head of U.S. equities at Baring Asset Management Inc. in Boston.

U.S. stocks rallied earlier in the day and European and Asian shares extended a recovery from last week's $2.1 trillion global rout on earnings from General Motors Corp. and Sun Microsystems Inc. that topped analysts' estimates.

Rally Erased

The gains in the U.S. were erased after American Home, a provider of loans to borrowers without top-rated credit, said $450 million to $500 million of loans probably won't get funded.

Oil's climb to a one-year high above $78 a barrel and a report that showed the biggest drop in home prices in at least six years also drove the retreat.

Financial shares also turned lower after investor Jeremy Grantham said up to half of all hedge funds may close in the next five years.

American Home plummeted $9.43, or 90 percent, to $1.04. The lender, whose shares stopped trading at $10.47 yesterday after it disclosed a cash shortage, has been cut off from credit and didn't have money yesterday to make $300 million of mortgages it had already agreed to provide, the Melville, New York-based company said today in a statement.

Concern subprime losses may spread were exacerbated by a report that two high-yield funds run by Australia's Macquarie Bank Ltd. may lose A$300 million ($255 million). The funds invested in secured corporate loans, the Australian newspaper reported, whose value was reduced by fallout from the U.S. subprime crisis. After the close of trading Macquarie said investors in the funds may lose as much as 25 percent of their money.

Broker Shares

Goldman Sachs, the largest U.S. securities firm by market value, dropped $7.40 to $188.34. Lehman, the fourth biggest, fell $2.80 to $62. Bear Stearns, the biggest broker for U.S. hedge funds, slipped $6.03, or 4.7 percent, to $121.22.

Shares of MGIC Investment Corp. fell the most ever and Radian Group Inc. posted its biggest tumble in eight years after the home-loan insurers said their stakes in a subprime mortgage company, valued at more than $1 billion last month, may now be worthless.

MGIC, the largest U.S. insurer of home loans, lost $6.78, or 15 percent, to $38.66 for the steepest drop in the S&P 500. Radian plunged $6.49 to $33.71.

`Unprecedented'

Credit-Based Asset Servicing and Securitization LLC, the New York-based mortgage company jointly owned by MGIC and Radian, said in a statement it's trying to line up fresh cash from new investors. MGIC and Radian said yesterday ``unprecedented'' disruptions in mortgage markets this month may have destroyed their stakes, each valued at more than $500 million on June 30.

``The subprime story is far from over,'' said Matthew Kaufler, who helps manage $2.6 billion at Clover Capital Management in Rochester, New York. ``We don't think it's going to bring down the economy by any means, but it will rattle investors' fears from time to time.''

Apple shares fell $9.67, or 6.8 percent, to $131.76, the biggest retreat in more than two years. Some investors are speculating Apple is reducing production of either its popular iPod music players or the iPhone, perhaps by as much as 50 percent, said Gene Munster, an analyst at Piper Jaffray Cos. in Minneapolis.

``People are going crazy without knowing anything definitive, and those fears are swinging the shares,'' said Munster, who has rated Apple ``outperform'' since June 2004.

The iPhone, which combines a music player with a mobile phone and Web browser, went on sale June 29.

Marathon, Western Oil

Marathon Oil Corp. fell $1.80 to $55.20. The fourth-biggest U.S. energy company agreed to buy Western Oil Sands Inc. for $5.46 billion to tap Canadian crude deposits estimated to be the largest outside Saudi Arabia.

GM reported a second-quarter profit that was more than double analysts' estimates on rising sales in Europe and reduced spending in North America. The largest U.S. automaker gained as much as 6.3 percent when Deutsche Bank AG recommended investors buy shares. The stock fell 21 cents for the day to $32.40 on new concerns about loans to buyers with low credit scores.

Sun Microsystems Inc. climbed 21 cents, or 4.3 percent, to $5.10, the biggest gain in four months. Rising sales and falling component costs helped the company top its profit forecast.

Economy Watch

Consumer spending in the U.S. increased in June at the slowest pace in nine months as near-record gasoline prices and falling home values forced Americans to cut back. The 0.1 percent rise in spending reported by the Commerce Department was in line with economists' average estimate in a Bloomberg survey.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred inflation measure, rose 0.1 percent for a fourth consecutive month. Economists in a survey had expected a 0.2 percent gain.

Consumer confidence in the U.S. climbed more than forecast in July to the highest in almost six years, spurred by job and income growth and lower gasoline prices. The New York-based Conference Board's index rose to 112.6 in July from a revised 105.3 the prior month.

Reports also showed home prices in 20 U.S. cities fell the most in at least six years in May, suggesting the housing recession has yet to touch bottom, and a measure of U.S. business output fell more than forecast in July, adding to doubts that corporate investment will continue to grow.

European Gains

European gains were led by financial companies including Aviva Plc, HSBC Holdings Plc and UBS. GlaxoSmithKline Plc, the region's second-largest drugmaker, jumped the most in two years after a panel of medical specialists said its Avandia drug should remain on the U.S. market. Olympus Corp. and Hang Seng Bank Ltd. paced an advance in Asia after the companies reported higher earnings.

Stocks tumbled last week, giving the S&P 500 its steepest weekly drop in almost five years, after turmoil among borrowers prompted investors to flee riskier assets. Chrysler and Alliance Boots Plc failed to find buyers for $20 billion of buyout loans, fueling concern the record pace of takeovers would subside.

The S&P 500 fell 3.2 percent this month, reducing its gain this year to 2.6 percent. The Dow fell 1.5 percent, paring its 2007 advance to 6 percent.

The Russell 2000 Index, a benchmark for companies with a median market value of $648 million, dropped 1 percent to 776.12. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.2 percent to 14,682.66. Based on its decline, the value of stocks decreased by $213 billion.

American Home Mortgage Investment Corp. (AHM US)
Apple Inc. (AAPL US)
Bear Stearns Cos. (BSC US)
General Motors Corp. (GM US)
Goldman Sachs Group Inc. (GS US)
Lehman Brothers Holdings Inc. (LEH US)
Marathon Oil Corp. (MRO US)
MGIC Investment Corp. (MTG US)
Radian Group Inc. (RDN US)
Sun Microsystems Inc. (SUNW US)

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

Last Updated: July 31, 2007 18:21 EDT