July 15 (Bloomberg) -- U.S. stocks dropped, sending the Standard & Poor's 500 Index to the lowest since 2005, as a plunge in oil dragged down energy shares and investors lost confidence in the government's plan to rescue Fannie Mae and Freddie Mac.

Exxon Mobil Corp. slid the most since March as crude fell more than $6 a barrel on concern a slower economy will curtail demand. Fannie Mae and Freddie Mac, the largest U.S. mortgage- finance companies, tumbled more than 26 percent. The S&P 500 Financials Index dropped 3 percent, capping its steepest-ever five-day retreat and giving the industry a smaller market value than health care for the first time since 1992, S&P data show.

The S&P 500 slipped 13.39 points, or 1.1 percent, to 1,214.91. The Dow Jones Industrial Average lost 92.65, or 0.8 percent, to 10,962.54, its first close below 11,000 in two years. The Nasdaq Composite Index added 2.84, or 0.1 percent, to 2,215.71. Two stocks fell for each that rose on the New York Stock Exchange.

``We're getting hit from multiple sides,'' said Russ Koesterich, who helps oversee $2 trillion as head of investment strategy at Barclays Global Investors in San Francisco. ``There's further evidence of deceleration in the economy.''

Benchmark indexes tumbled as much as 2 percent in morning trading and the dollar weakened the most against the yen since March and touched a record low against the euro after Federal Reserve Chairman Ben S. Bernanke said the risks of an economic slowdown and faster inflation are increasing. Swings in financial shares sent the S&P 500 careening between gains and losses at least 12 times in the afternoon.

Exxon, Crude Oil

Exxon, the largest U.S. oil company, slid $3.23, or 3.8 percent, to $82.19, leading energy shares in the S&P 500 to a 4.2 percent retreat, the most among 10 industries. Crude oil for August delivery fell 4.5 percent to $138.69 a barrel in New York.

Freddie Mac lost $1.85 to $5.26, extending a 17-year low. Fannie Mae retreated $2.66, or 27 percent, to $7.07, its steepest loss since at least 1980.

While Freddie Mac and Fannie Mae's shares have tumbled this year, Vanguard Group and Federated Investors Inc. said they will continue to buy the short-term debt of the companies. The cost to protect debt of Fannie Mae and Freddie Mac from default fell to the lowest in two months yesterday.

The division between bonds and stocks shows that while investors are confident Treasury Secretary Henry Paulson won't permit the collapse of the two companies, shareholders are at greater risk because the government-sponsored companies may require new equity after already raising $20 billion in the past year to cover losses.

Ackman's Bearish Bet

Hedge fund manager William Ackman said he is betting Fannie Mae and Freddie Mac will keep slumping and proposed a reorganization that would wipe out shareholders.

The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, as well as Freddie Mac and Fannie Mae, as part of a crackdown on stock manipulation, Chairman Christopher Cox told the Senate Banking Committee.

Following his remarks, the S&P Financials Index erased a decline of as much as 5.7 percent and rose as much as 2.3 percent before resuming its slide.

The financial index fell to the lowest since October 1998, buffeted by Oppenheimer & Co. analyst Meredith Whitney's statement that U.S. banks should write down more of the value of their home loans to reflect an increasingly dismal outlook for housing. She correctly predicted Citigroup Inc.'s dividend cut this year.

`Dramatically Diminished'

Wachovia Corp., the fourth-largest U.S. lender, fell 7.7 percent to a 17-year low of $9.08. Whitney downgraded the shares to ``underperform,'' saying the company's earnings outlook has ``dramatically diminished'' and prospects for its shareholders are ``bleak.''

Wachovia is ``a fundamentally strong and stable company on solid footing,'' spokeswoman Christy Phillips Brown said today in an e-mailed statement.

American International Group Inc. lost 8.5 percent to $20.64 today for the biggest drop in the Dow average. Wachovia downgraded the world's largest insurer to ``market perform'' from ``outperform.'' AIG may post as much as $7 billion in losses on credit-default swaps in the second quarter after about $20 billion in losses on the contracts over two quarters, analyst John Hall said in a report.

Washington Mutual Inc., the largest U.S. savings and loan, rebounded from its biggest drop in 25 years after telling investors that it's ``well capitalized.'' The shares, which tumbled 35 percent yesterday after the government's seizure of IndyMac Bancorp Inc. spurred concern more regional banks will fail, rallied 12 percent to $3.61 today.

$13 Trillion Erased

More than $13 trillion has been wiped off the value of global equities since October as $416 billion in credit-related losses prolonged the global economy's slump and rising commodity prices stoke inflation. Among the 23 industrialized nations in the MSCI World Index, only Canada has averted a bear market.

``There's a feeling among investors that there's no place to hide,'' said Joseph Quinlan, the New York-based chief market strategist for the global wealth and investment management division of Bank of America Corp., which oversees $607 billion. ``Sentiment has turned sour globally. It's not just in the U.S., it's across the globe.''

Financial, telephone and consumer shares led the S&P 500's 17 percent retreat this year even as the Fed slashed its benchmark interest rate seven times since September to bolster debt markets and make borrowing cheaper.

Valuations

The S&P 500 trades for 20.1 times the reported earnings of companies in the index, while the MSCI World trades for 13.8 times, according to data compiled by Bloomberg. Last week, the S&P 500 was the most expensive relative to the MSCI World, excluding the U.S., on a price-to-earnings basis since 2001, Bloomberg data show.

State Street Corp. added 7.1 percent to $59.65. The world's biggest money manager for institutions said second-quarter earnings rose 50 percent as lower interest rates made investing client deposits more lucrative.

First Horizon National Corp., Tennessee's biggest bank, had its biggest one-day gain ever as new Chief Executive Officer Bryan Jordan said the lender doesn't need to raise more capital because it has enough money on hand. The shares rallied 17 percent to $5.89.

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

Last Updated: July 15, 2008 18:12 EDT