May 9 (Bloomberg) -- U.S. stocks fell, sending the market to its first weekly drop in a month, after American International Group Inc. said it needs to raise $12.5 billion to cover writedowns and concern grew the rally in commodities will end.

AIG, the world's largest insurer, slumped the most since February as the company's second straight quarterly deficit spurred speculation more losses are coming in the financial industry. Freeport-McMoRan Copper & Gold Inc. posted its biggest decline in a week after rising copper stockpiles signaled demand from China is slowing. Exxon Mobil Corp. led energy shares lower, even as crude oil topped $126 a barrel for the first time.

The Standard & Poor's 500 Index sank 9.4, or 0.7 percent, to 1,388.28, giving it a 1.8 percent retreat this week. The Dow Jones Industrial Average slid 120.9, or 0.9 percent, to 12,745.88. The Nasdaq Composite Index lost 5.72, or 0.2 percent, to 2,445.52. Three stocks fell for every two that rose on the New York Stock Exchange, where with only 1.09 billion shares traded it was the slowest session of the year.

``Oil and commodities have been a safe place to hide while the market was melting down,'' said James Gaul, a Boston-based portfolio manager at Boston Advisors LLC, which oversees about $2 billion. ``In the face of a global slowdown, is the demand going to be there two months or six months from now?''

Raw-materials and energy stocks have been the best performing of 10 industry groups in the S&P 500 in the six months since the index peaked. The Reuters/Jefferies CRB Index, a gauge of commodity prices, has almost doubled since the end of 2001 as global demand surged.

AIG Tumbles

AIG lost $3.87, or 8.8 percent, to $40.28, contributing the most to the declines in the S&P 500 and Dow. The world's largest insurer reported a first-quarter net loss of $7.81 billion, compared with earnings of $4.13 billion a year earlier. AIG wrote down contracts it had sold to protect investors by $9.11 billion in the quarter to comply with rules that require the company to estimate their present market value. Standard & Poor's and Fitch Ratings cut the company's credit grades after the announcement.

Financial companies in the S&P 500 fell for a third straight day, paring their rebound since March 17 to 11 percent.

``We're still cautious on the financials,'' said Julie Van Cleave, who oversees $4.5 billion as head of large U.S. growth stocks at Deutsche Asset Management in Milwaukee. ``There's more discovery to come.''

Citigroup Inc. lost 2.8 percent to $23.63. The biggest U.S. bank said it plans to sell $400 billion in assets as part of a program to return to profitability. The company, which lost $5.1 billion in the first quarter, has recorded more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year.

Freeport, Nucor

Freeport, the world's second-largest copper producer, slumped 3.3 percent to $114.22. Copper fell for a second week as rising stockpiles indicated China, the world's largest user, slowed purchases because of near-record prices. Inventories tracked by the London Metal Exchange jumped 10 percent to 121,275 metric tons, the largest gain since August 2005.

Nucor Corp. led the Russell 3000 Steel Industry index to a 2.5 percent drop from a record. Nucor, the largest U.S.-based steelmaker by market value, fell 4.2 percent to $78.41.

Exxon the largest U.S. energy company, slid 0.8 percent to $88.82. Crude oil reached $126.27 a barrel in New York as the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline.

`Unsustainable'

``People are looking at the move in crude and saying it's unsustainable and due for a pullback,'' said Michael Chren, a Palm Beach Gardens, Florida-based money manager at Allegiant Asset Management Co., which oversees $30 billion. ``That's why there's weakness in crude-related plays. They've had a good run.''

Tesoro Corp., the largest refiner in the U.S. West, tumbled as rising oil prices crimp profits of companies that refine crude. Oppenheimer & Co. analyst Fadel Gheit lowered his 2008 and 2009 profit forecasts for Tesoro, sending the shares down 5.5 percent to $21.96.

Valero Energy Corp. fell 3.7 percent to $44.56, the lowest since August 2005. Goldman Sachs Group Inc. said the biggest U.S. refiner may face reductions in profit estimates. Dril-Quip Inc., which makes equipment for offshore oil and gas production, retreated 2.3 percent to $59.54 after profit missed estimates by 10 percent.

Mylan

Mylan Inc. fell 8.4 percent to $11.42. The largest U.S. maker of generic medicines reported a wider first-quarter loss on costs tied to the $6.9 billion purchase of Merck KGaA's generics division in October.

H&R Block Inc., the biggest U.S. tax preparer, rose 7.8 percent to $23.57 for the biggest rally in almost three years. The Office of Thrift Supervision lifted a rule that the company set aside reserves for its bank.

Teco Energy Inc. gained 7.6 percent to $19.05, its best increase in four years. The utility owner was raised to ``buy'' from ``hold'' at Citigroup, which said its mining unit will benefit more from rising coal prices than the analysts had previously estimated. Greg Gordon increased his profit estimates for 2009 and 2010 and said Teco may climb to $21.50 in the next year.

AES Corp. rose 6.6 percent to $19.11. The U.S. power producer with operations in 27 countries reported first-quarter profit that beat analyst estimates. Excluding costs for asset impairment and other one-time items, profit was 39 cents a share, AES said, beating by 11 cents the average of 4 analyst estimates compiled by Bloomberg.

Priceline Rallies

Priceline.com Inc. surged $14.85, or 12 percent, to $138.63. The Internet travel agency featuring William Shatner as its spokesman said annual profit, excluding some items, may be as much as $5.65 a share. That topped the average analyst estimate of $5.09 a share. First-quarter revenue gained 34 percent as international sales more than doubled, the company said.

The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, rose 0.1 percent to 720.05. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 0.6 percent to 14,040.05. Based on its decline, the value of stocks decreased by $101.26 billion.

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

Last Updated: May 9, 2008 16:58 EDT