July 11 (Bloomberg) -- U.S. stocks fell, extending the longest stretch of weekly losses for the Standard & Poor's 500 Index since 2004, as growing concern about the health of Fannie Mae and Freddie Mac sent bank shares to an 11-year low.

The market briefly erased its losses, with the S&P 500 turning higher for two minutes in the day's final hour, as traders speculated the Federal Reserve may allow Fannie and Freddie to borrow from its discount window. The government- chartered companies, the largest sources of financing for U.S. home loans, still fell to 17-year lows on concern they will require a bailout that could wipe out shareholders.

``It's a giant rollercoaster right now,'' said Paul Kandel, a New York-based senior portfolio manager at Sentinel Asset Management, which oversees about $5 billion. ``We're in the type of market where the burden of proof is on the bulls, so the market appears to be heading down unless we get a great reason to send it up.''

The S&P 500 lost 13.9, or 1.1 percent, to 1,239.49, its lowest level in two years. The Dow Jones Industrial Average fell 128.48, or 1.1 percent, to 11,100.54 after earlier tumbling as much as 251 points. The Nasdaq Composite Index slipped 18.77, or 0.8 percent, to 2,239.08. About five stocks dropped for every three that rose on the New York Stock Exchange.

All 10 industry groups in the S&P 500 retreated as a jump in oil and gasoline prices to records also weighed on the market. The MSCI World Index, which tracks 1,742 companies in 23 developed markets, slid 1.1 percent, extending its slump from an October record to the 20 percent threshold that signals the start of a bear market.

Fannie, Freddie

Fannie shares opened the day down as much as 49 percent and Freddie dropped as much as 51 percent. A government takeover of one or both companies is among options that could be considered by White House officials, said Joshua Rosner, an analyst with Graham Fisher & Co. Inc., who met with the administration yesterday.

Officials may push for the firms, which own or guarantee about half of the $12 trillion of U.S. mortgages, to be placed in a conservatorship if their problems get worse, he said.

Fannie and Freddie rallied from their lows today after Treasury Secretary Henry Paulson said the government backs the lenders ``in their current form,'' signaling the administration's intent to keep them as shareholder-owned companies, rather than placing them under government control.

The stocks got an added boost after Citigroup Inc. advised clients to buy the shares and Senate Banking Committee Chairman Christopher Dodd said Fannie and Freddie have [=^]several[^=] [=^]options[^=] for capital and liquidity, including gaining access to the Fed's discount window. Fannie fell 22 percent to $10.25 at the close of trading and Freddie lost 3.1 percent to $7.75.

Solvency Concern

Fed spokeswoman Michelle Smith said in an interview after exchanges closed that the central bank hasn't had talks with Fannie or Freddie about the discount window.

Freddie said in a statement after markets closed that the company has no immediate need to raise money and it has a number of options to manage capital. Fannie Mae said in an e-mailed statement after trading hours that it has ``ample sources of liquidity'' and is ``maintaining a strong capital base.

``Fannie Mae remains well equipped to fulfill our critical role in the housing finance system,'' the statement said.

Fannie and Freddie shares have both dropped more than 80 percent in New York trading over the past year on concern they don't have enough capital to weather the worst housing slump since the Great Depression. William Poole, the former St. Louis Federal Reserve president, said this week that Freddie is ``insolvent,'' meaning it owes more than its assets are worth.

`Very Cautious'

``We're very cautious on the financials and unfortunately we keep finding reasons to stay cautious,'' Jack Caffrey, a New York-based equity strategist at JPMorgan Private Bank, which oversees about $300 billion, said in an interview on Bloomberg Television. ``You have this sector under pressure and it will likely remain under pressure.''

The KBW Bank Index of 24 companies slumped 2.6 percent to its lowest level since January 1997, while the S&P 500 Financials Index of 89 stocks reached an almost six-year low. The Financial Select Sector SPDR Fund, an exchange traded fund that tracks U.S. financial stocks, lost 2.8 percent to $18.68.

Other companies with home-loan businesses plunged today. Lehman Brothers Holdings Inc., once the biggest U.S. underwriter of mortgage bonds, dropped $2.87 to $14.43. Wachovia Corp., the fourth-largest U.S. bank, lost $1.59 to $11.54. Bank of America Corp., which closed its acquisition of mortgage-company Countrywide Financial Corp. last week, retreated 69 cents to $21.67.

Homebuilders, Retailers Drop

Homebuilders also tumbled. Lennar Corp. dropped 63 cents to $10.31. D.R. Horton Inc. fell 30 cents to $9.62. The S&P 500 Homebuilding Index declined 3.4 percent to the lowest since 2001.

Companies that rely on consumers' discretionary purchases to boost sales retreated 1.3 percent as a group after the surge in crude oil and gasoline prices bolstered expectations that Americans will reduce spending on vacations, clothes and electronics.

Wal-Mart Stores Inc., the world's largest retailer, lost 92 cents to $56.29. Best Buy Co., the biggest U.S. electronics retailer, declined 95 cents to $37.61. Walt Disney Co., the largest operator of theme parks, slumped 40 cents to $29.20.

Crude futures jumped $3.43 to settle at $145.08 after earlier rising to as high as $147.27 on concern that Israel may be preparing to attack Iran, while a strike in Brazil and renewed militant activity in Nigeria threaten to cut supplies. Prices have doubled in the past year.

`Worst of Both Worlds'

``It's the worst of both worlds,'' said Matthew Kaufler, a portfolio manager at Clover Capital Management Inc. in Rochester, New York, which oversees $2.7 billion. ``Watching two government-sponsored entities evaporate before our eyes from an equity perspective, and the damage that does to investor confidence on the one hand. And watching the price of oil, which is clearly meaningful from a consumer and business perspective, continue to escalate upward creates other pressures.''

Prices of goods imported into the U.S. rose more than forecast in June as record energy costs and a decline in the dollar made purchases of foreign products more expensive. The 2.6 percent increase in the import price index last month matched the gain in May, the Labor Department said today. The index jumped 20.5 percent from a year ago, the biggest year- over-year increase on record.

139 52-Week Lows

The market's retreat sent some of America's largest companies to the lowest levels in at least a decade today as 139 stocks in the S&P 500 touched 52-week lows, according to data compiled by Bloomberg.

American International Group Inc., the largest insurer, declined 91 cents to $23.08, the lowest since September 1996. Merrill Lynch & Co., the third-largest U.S. securities firm, fell $1.10 to $27.61, the lowest since October 1998.

Liz Claiborne Inc., the maker of Kate Spade handbags and Juicy Couture clothing, dropped 72 cents to $11.44, an almost 13-year low. Sun Microsystems Inc., the world's fourth-largest maker of computer servers, declined 66 cents to $9.11, the lowest since October 1995.

Apple Inc. tumbled $4.05 to $172.58 even as the debut of its iPhone 3G drew thousands across Asia and Europe, with customers creating a half-a-mile-long line in Tokyo and braving summer heat in Madrid. AT&T Inc. said problems with Apple's iTunes service prevented customers from activating their handsets today in its stores as planned. AT&T, Apple's exclusive U.S. partner, lost 19 cents to $32.58.

Wynn Rallies

Wynn Resorts Ltd. added $8.20 to $78.14. The casino company founded by billionaire Stephen Wynn reported second-quarter profit that rose more than some analysts estimated and said it would buy back as much as $500 million more in stock.

Anheuser-Busch Companies Inc. climbed $5.29 to $66.50. InBev NV raised its offer to buy the brewer by $3.6 billion to $49.9 billion, and the companies are now discussing a possible merger, a person with knowledge of the talks said. Discussions over the $70-a-share bid may still fall through, the person said.

The benchmark index for U.S. stock options rose to the highest since March. The VIX, as the Chicago Board Options Exchange Volatility Index is known, added 7.4 percent to 27.49. The index measures the cost of using options as insurance against declines in the S&P 500.

The S&P 500 fell into a bear market on July 9 and has declined for six straight weeks. The index, tracked by funds with about $1.5 trillion at the end of 2007, has erased the 12 percent rally spurred by a government-backed rescue of Bear Stearns Cos. for less than its market value in March. Equities resumed their retreat from an October record as energy costs surged, banks' credit writedowns topped $400 billion worldwide and unemployment rose, threatening to reduce corporate profits even as Fed officials consider raising interest rates to fight inflation.

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

Last Updated: July 11, 2008 18:08 EDT