March 31 (Bloomberg) -- U.S. stocks fell this week, sending the Dow Jones Industrial Average to its first quarterly loss in almost two years, after Federal Reserve Chairman Ben S. Bernanke said inflation remains his main concern even as evidence mounts that the economy is slowing.

Industrial companies and financial firms led the Standard & Poor's 500 Index lower as concern mounted that a housing slump will spread beyond the riskiest, or subprime, borrowers and undermine growth. KB Home, Countrywide Financial Corp. and Lennar Corp. had the steepest retreats in the index.

Bernanke's comments prompted speculation the central bank won't reduce interest rates to prop up the economy. Reports this week showed falling home prices, weaker consumer confidence and lower-than-expected durable goods orders. Lennar, the biggest U.S. homebuilder, said it will miss its profit goal.

``In the next one or two earnings seasons, we're going to have a confessional in the financial community about exposure to subprime,'' said James Thorne, who oversees more than $13 billion as chief capital market strategist at MTB Investment Advisors in Baltimore. ``On top of that, you get the Fed saying inflation is still a concern. An interest rate cut is not going to come as quickly as the stock market would like.''

The S&P 500 slipped 1.1 percent to 1420.86 this week. The Dow industrials fell 1 percent to 12,354.35, while the Nasdaq Composite Index lost 1.1 percent to 2421.64.

`Real Threat'

During the first quarter, the S&P gained 0.2 percent and the Nasdaq added 0.3 percent for the third straight quarterly advance. By losing 0.9 percent, the Dow industrials posted its first quarterly decline since the second quarter of 2005.

In testimony before Congress, Bernanke said inflation is a ``greater risk'' than slower growth.

Economic data this week included the S&P/Case-Shiller index, which showed home values dropped 0.2 percent in January from a year earlier. The Conference Board's index of consumer sentiment dropped to 107.2 this month from 111.2 in February. Excluding transportation, orders for durable goods unexpectedly fell 0.1 percent in February, the Commerce Department said.

``Housing is an area people are looking at as a real threat to pull the entire economy down with it,'' said Jerry Castellini, who helps manage $2 billion for CastleArk Management in Chicago. ``Ultimately it means a recession, which will pull stocks back.''

Lennar Drops

Economists at Morgan Stanley, Nomura Securities International Inc. and HSBC Securities USA Inc. were among those cutting U.S. first-quarter growth forecasts. Fourth-quarter gross domestic product growth was 2.5 percent, according to a revised figure from the Commerce Department this week.

Industrial companies in the S&P 500 lost 2 percent, while financial firms retreated 1.9 percent. They fell the most among 10 industries in the S&P 500.

Lennar fell 7.4 percent to $42.21. The company reported earnings plummeted 73 percent last quarter as demand waned. Lennar said it will likely miss its 2007 profit forecast as the normally stronger spring selling season had not materialized.

KB Home, a homebuilder, fell 8.9 percent to $42.67. Countrywide, the biggest U.S. mortgage lender, slipped 8.7 percent to $33.64.

Beazer Homes USA Inc. tumbled 12 percent to $29.03. The FBI started an investigation into the homebuilder and the U.S. Attorney's office requested documents on its mortgage business.

Home Depot Falls

General Motors Corp., the world's largest automaker, fell 4.2 percent to $30.64 for the biggest loss in the Dow average. GMAC LLC, formerly the wholly owned finance unit of GM, said losses from subprime lending at its Residential Capital home mortgage division will hurt earnings this year.

GM still owns 49 percent of GMAC.

Among retailers linked to the housing market, Home Depot Inc. fell 3.9 percent to $36.74 for the Dow's second-biggest loss. The company is the world's largest home-improvement retailer.

Crude oil gained 5.8 percent to $65.87 a barrel, near a six-month high, this week in New York. Fifteen British naval personnel seized in the Persian Gulf remained in Iranian custody for an eighth day, heightening concern the standoff will threaten oil shipments.

``This week was more a function of the international story on oil and this continued look at housing,'' Castellini said.

Jones Apparel Group Inc. dropped 7.3 percent to $30.73 for the No. 4 decline in the S&P 500. Merrill Lynch & Co. downgraded its stock rating on the maker of Jones New York clothing and Nine West shoes following the resignation of Chief Financial Officer Thimio Sotos.

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Nick Baker in New York at nbaker7@bloomberg.net.

Last Updated: March 31, 2007 08:25 EDT