March 2 (Bloomberg) -- U.S. stocks dropped to a three-month low, completing their worst week since January 2003, after a decline in consumer confidence magnified the risk that profit growth will be wiped out by a recession.

Home Depot Inc., the biggest home-improvement retailer, slumped for a 12th day as data this week showed new-home sales declined the most in a decade. Alcoa Inc., the largest aluminum maker, and Exxon Mobil Corp., the biggest energy company, led the Dow Jones Industrial Average lower on speculation a weakening economy will reduce demand for metals and oil.

The Standard & Poor's 500 Index retreated 16, or 1.1 percent, to 1387.17. It dropped for the third time in the four days since a plunge in Chinese shares helped spark a worldwide rout. Slowing earnings growth, a rise in mortgage delinquencies and signs that U.S. manufacturing is contracting have sent the index down 5 percent since it reached a six-year high on Feb. 20.

``We've been long overdue for a correction,'' said Eric Teal, who oversees $6.5 billion as chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina. ``The fact that it was a little more panic-oriented should not surprise too many people.''

The Dow average decreased 120.24, or 1 percent, to 12,114.10, the lowest since Nov. 10. The Nasdaq Composite Index fell 36.21, or 1.5 percent, to 2368.

Global Retreat

Today's retreat followed a fourth straight drop in Europe and a slide in Asia that completed that region's worst weekly performance since July. The Dow Jones Stoxx 600 Index fell 0.3 percent, while the Morgan Stanley Capital International Asia- Pacific Index lost 0.8 percent.

An indicator that measures the rate of expected stock- market swings rose. The Chicago Board Options Exchange SPX Volatility Index, known as the VIX, surged 18 percent and closed above its level on Feb. 27, when stocks had their worst rout in four years.

For the week, the S&P 500 fell 4.4 percent, the Dow slid 4.2 percent, while the Nasdaq dropped 5.9 percent. About $837 billion of market value was lost in U.S. equity markets.

All three U.S. benchmarks erased their year-to-date gains. Along with the slump in home sales, reports this week showed orders for durable goods fell the most in three years, while a barometer of business activity dropped to the lowest since October 2002.

Dresdner Kleinwort, the top-ranked strategy team in the world, said the global equity selloff isn't over and recommended investors reduce stocks and buy government bonds.

`Excess'

``Stock prices cannot go up indefinitely,'' said Matthew Kaufler, who helps manage $2.6 billion at Clover Capital Management in Rochester, New York. ``You need to wring a little of the excess out from time to time. It wouldn't surprise me at all that sometime here in 2007 we have a pullback of 10 percent to 20 percent.''

Consumer confidence declined as fuel prices rose, a day after the government reported an increase in jobless claims. The Reuters/University of Michigan's reading for consumer sentiment fell to 91.3 last month from 96.9 in January. The figure compares with an initial reading of 93.3 issued Feb. 16.

St. Louis Federal Reserve Bank President William Poole today acknowledged there ``could be'' a recession, though one isn't likely. The central bank's consensus estimate is for growth above 2.5 percent in the coming year.

Almost seven stocks fell for every one that rose on the New York Stock Exchange. Some 1.9 billion shares changed hands on the Big Board, 21 percent more than the three-month daily average.

Home Depot dropped 44 cents to $39.01. The stock's 12-day, 6.6 percent retreat is the longest since the company went public in September 1981. The government this week said new-home sales tumbled in January by the most in 13 years and fourth-quarter economic growth was less than previously estimated, dousing speculation that the worst of the slowdown is over.

GM

General Motors Corp. slid 92 cents to $30.62 after the automaker said it delayed releasing its annual report. According to analysts, the postponement may signal that GM will have to repay some proceeds from last year's $14.4 billion sale of its General Motors Acceptance Corp. finance unit to a group led by Cerberus Capital Management LP because of bad home loans.

Countrywide Financial Corp., the biggest U.S. mortgage lender, yesterday said almost one out of every five subprime borrowers were late on payments at the end of last year. Its shares slipped 42 cents to $37.02.

Alcoa slid 55 cents to $32.70 and Exxon dropped 98 cents to $70.01. The two helped give raw materials and energy producers the steepest drops among 10 industry groups in the S&P 500.

Technology Shares

Shares of computer-related companies were the biggest drag on the benchmark. Novell Inc., which sells networking software and computer-consulting services, dropped 26 cents to $6.45 after reporting a first-quarter loss on declining sales.

Ciena Corp. slid $1.18 to $27.10. The maker of computer- networking equipment yesterday forecast quarterly profit that trailed analysts' estimates.

This week's global equity selloff has encouraged investors to repay yen they had borrowed to buy higher-yielding assets. The Japanese currency rose to its highest in almost three months against the dollar, and had its biggest weekly gain since December 2005.

The yen is the world's best performing currency this week as investors unwind so-called carry trades where they buy the currency to repay their loans. Japan's interest rate is the lowest among industrialized nations.

Japan's currency has gained 3.6 percent against the dollar this week. It recently traded at 116.85 per dollar in New York from 121.08 on Feb. 23.

AIG

American International Group Inc. advanced $2.13, or 3.2 percent, to $69.54 for the top gain in the Dow average. The world's largest insurer said it will buy back up to $8 billion in shares, with $5 billion coming during 2007. That amounts to 4.6 percent of the outstanding stock. AIG will also increase its dividend by 20 percent a year beginning in May.

Kohl's Corp. rallied $3.73 to $71.26. The fourth-largest U.S. department-store company said profit increased to $1.48 a share last quarter. The average analysts' estimate was $1.42, according to a Bloomberg survey.

Nasdaq Stock Market Inc. fell $1.05 to $28.25. The biggest U.S. electronic equity market was downgraded by JPMorgan to ``neutral'' from ``overweight.'' The company's plan to reduce some transaction fees for its largest customers may hurt its business, according to JPMorgan analysts.

Spiders, Futures

S&P 500 shares, called Spiders, lost $1.84 to $138.67. Nasdaq-100 Index tracking shares, known by their QQQQ symbol, fell 65 cents to $42.48.

S&P 500 futures expiring in March slid 19.10 to 1385.80 on the Chicago Mercantile Exchange. Nasdaq-100 futures retreated 31.50 to 1726.25.

The Russell 2000 Index, a benchmark for companies with a median market value of $665 million, dropped 2 percent to 775.44. The Dow Jones Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, declined 1.2 percent to 14,060.13. Based on its retreat, the value of stocks decreased by $220 billion.

Alcoa Inc. (AA US)
American International Group Inc. (AIG US)
Ciena Corp. (CIEN US)
Countrywide Financial Corp. (CFC US)
Exxon Mobil Corp. (XOM US)
General Motors Corp. (GM US)
Home Depot Inc. (HD US)
Kohl's Corp. (KSS US)
Nasdaq Stock Market Inc. (NDAQ US)
Novell Inc. (NOVL US)

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

Last Updated: March 2, 2007 17:28 EST