Sept. 5 (Bloomberg) -- U.S. stocks fell for the first time in three days after fresh evidence of the deepening housing slump raised some corporate borrowing costs to a seven-year high and lowered earnings forecasts for financial companies.

Lehman Brothers Holdings Inc. and Morgan Stanley pushed financial shares to their biggest drop in six days on concern their profits will decline because of losses tied to subprime mortgages. Every homebuilder in Standard & Poor's indexes retreated. Apple Inc. slipped the most in a month after the iPod maker cut prices on mobile phones.

The S&P 500 Index lost 17.13, or 1.2 percent, to 1,472.29. The Dow Jones Industrial Average decreased 143.39, or 1.1 percent, to 13,305.47. The Nasdaq Composite Index fell 24.29, or 0.9 percent, to 2,605.95. Stocks erased yesterday's gains, which followed the first monthly advance since May.

``There's a whole litany of negative news today,'' said Robert Morgan, who helps oversee $10.5 billion as senior vice president at Janney Montgomery Scott LLC in Philadelphia. ``Bodies keep washing ashore that are related to subprime. I think that really helps facilitate dragging the market down.''

European stocks declined for the first time in a week after the London interbank offered rate climbed to its highest since January 2001. The Bank of England responded by offering extra cash to financial institutions and the European Central Bank said it's prepared to do the same. Asian shares also retreated, and the dollar sank as odds the Federal Reserve will cut rates by 0.5 percentage point increased.

Economy Watch

A private report said the number of Americans signing contracts to buy previously owned homes in July dropped by the most since records began in 2001. Other reports showed sales of commercial properties declined and companies added the fewest jobs in August in more than four years.

Ten-year Treasuries rallied as investors sought the relative safety of government debt, pushing the yield to a six-month low.

Lehman Brothers lost $2.11 to $54.35. Morgan Stanley dropped $1.37 to $62.56.

Estimates for third-quarter earnings at the two investment banks were cut by Citi Investment Research analysts as investors borrow less and fixed-income revenue declines.

Citi analyst Prashant Bhatia reduced his estimate for Lehman's earnings by 28 percent to $1.40 a share, below the $1.65 average estimate compiled by Bloomberg. For Morgan Stanley, Citi cut its estimate by 8.6 percent to $1.60, lower than the $1.69 average in Bloomberg's survey.

Homebuilders Slump

A gauge of homebuilders fell 4.3 as a group. Lennar Corp., the largest U.S. homebuilder, declined 80 cents to $27.77. D.R. Horton Inc., the second biggest, slipped 60 cents to $14.81. A gauge of real-estate companies decreased 2.7 percent.

Apple retreated $7.40, or 5.1 percent, to $136.76. The personal computer maker cut the price on the top version of the iPhone to $399, down from $599. The company plans to phase out a model that had less storage capacity and had been priced at $499. Microsoft Corp. lost 33 cents to $28.48. The world's largest software maker also cut the suggested retail price of its Zune music and video player by 20 percent to $199.

The S&P 500 has risen 3.8 percent this year. It gained 2.2 percent in the previous two days after Federal Reserve Chairman Ben S. Bernanke pledged to ``act as needed'' to keep losses in credit markets from sending the economy into a recession.

``The longer-term view'' for financial markets is ``healthy,'' said Thomas Sowanick, who helps manage $7 billion as chief investment officer of Clearbrook Financial LLC. ``We went through a prolonged period of excess in housing and housing- related debt and we're working our way through it.''

Higher Borrowing Costs

The three-month Libor dollar rate increased to 5.72 percent, the highest since January 2001, from 5.70 percent yesterday and 5.36 percent at the end of July, the British Bankers' Association said. Other short-term rates also rose.

The Bank of England offered extra cash to financial institutions and the European Central Bank said it is ``ready to contribute.''

The Fed added $8.5 billion in temporary reserves to the banking system when it arranged overnight repurchase agreements, or repos.

More than four stocks fell for every one that gained on the New York Stock Exchange. Some 1.4 billion shares changed hands on the Big Board, 19 percent less than the three-month daily average.

Citigroup

Citigroup Inc. dropped $1.21 to $46. The biggest U.S. bank may face losses on investment units known as ``conduits'' and Structured Investment Vehicles, which sell tens of billions of dollars of commercial paper, the Wall Street Journal said.

If the vehicles fail to sell the short-term debt, or suffer large losses on assets, Citigroup might have to lend money to keep them going, or take on some of the losses, the Journal said. The bank has about a quarter of the market for SIVs, according to a Citigroup research report, the newspaper wrote.

The units are robust and their asset portfolios are performing well, according to a letter written by Paul Stephens and Richard Burrows, who head the group that supervises Citigroup's SIVs. A Citigroup spokesman declined to comment on SIV losses, the newspaper added.

Separately, Erik Sirri, head of the U.S. Securities and Exchange Commission's market regulation division, said the agency is scrutinizing the biggest Wall Street securities firms to find out whether they face losses from affiliated investment vehicles such as conduits that sold short-term debt.

Financial shares in the S&P 500 retreated 2.1 percent as a group and contributed the most to the decline in the overall index.

Costco, Tyson

Costco Wholesale Corp. dropped $2.61, or 4.2 percent, to $59, the biggest decline since April 2005. The discount warehouse that sells everything from towels to computers said August sales at stores open at least a year rose 2 percent, less than analysts estimated. Analysts surveyed by research firm Retail Metrics LLC estimated a 5.3 percent gain.

Tyson Foods Inc. had the steepest drop in six years, falling $2.84, or 13 percent, to $19.17. The biggest U.S. meat processor cut its full-year earnings forecast as fourth-quarter cattle and hog costs rose more than expected and beef sales to South Korea were disrupted. Profit will be 72 cents to 80 cents a share, Tyson Foods said. The company had previously forecast 82 cents to 92 cents.

'Enough Fear'

``As companies start to miss earnings forecasts and you get profit margin contraction, I think that could create enough fear for another sell-off,'' said Vadim Zlotnikov, chief equity strategist at Sanford C. Bernstein & Co. in New York.

Forest Laboratories Inc. jumped the most in a year, rising $3.75, or 10 percent, to $41.63. The drugmaker won a U.S. appeals court ruling upholding the patent on its antidepressant Lexapro and a ban on generic competition from Teva Pharmaceutical Industries Ltd.

In economic reports, the index of signed purchase agreements, or pending home resales, fell 12.2 percent in July to 89.9, the National Association of Realtors said. Economists in a Bloomberg survey projected a 2.2 percent drop.

Separately, investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show.

Jobs Report

U.S. companies added the fewest jobs in August since June 2003, a report by ADP Employer Services showed. The 38,000 increase last month was less than half the 80,000 gain predicted in a Bloomberg survey of economists.

The Organization for Economic Cooperation and Development trimmed its 2007 forecast for U.S. economic growth to 1.9 percent from a 2.1 percent estimate in May. Economists polled by Bloomberg in the first week of August expect 2 percent growth.

Still, the Fed said the effects of the credit-market rout on the broader economy were ``limited'' beyond the housing industry, according to its regional business survey. ``Economic activity has continued to expand'' nationwide, the central bank said in the Beige Book report.

All 10 industry groups in the S&P 500 declined. The benchmark index has swung more than 1 percent in five of the last six trading sessions.

Assurant, Altria

Assurant Inc. declined $1.79 to $50.14. The insurer that is undergoing an accounting probe said it suspended a stock buyback program and doesn't expect to initiate a new one this year.

Altria Group Inc., the world's largest tobacco company, slid $1.04 to $68.63 after Goldman, Sachs & Co. cut its recommendation on the stock to ``neutral'' from ``buy.''

Guess? Inc. lost $1.95 to $51.45. The clothing maker said annual profit would be $1.79 to $1.84 a share. Analysts estimated $1.83, on average, according to a Bloomberg survey.

Bradford & Bingley Plc paced a decline in Europe after Lehman Brothers cut its recommendation on shares of the U.K. mortgage lender, saying rising loan costs may erode earnings.

Credit Suisse Group American depositary receipts, each representing one share, dropped $1.13 to $66.22. Deutsche Bank AG lost $2.38 to $125.92. The two European investment banks will take a ``material hit'' to earnings from writedowns associated with securities related to U.S. subprime loans, said Lehman analysts.

Mizuho Financial Group Inc., Japan's second-biggest bank, fell after the country's chief financial regulator said he will monitor banks' credit-market losses.

Europe's Dow Jones Stoxx 600 Index fell 1.8 percent to 372.66. Japan's Nikkei 225 Stock Average dropped 1.6 percent to 16,158.45.

Fed Watch

Traders boosted bets the Fed will lower its 5.25 percent benchmark lending rate at its September meeting. Fed funds futures showed a 72 percent chance of a 0.5 percentage point rate cut, compared with a 54 percent chance yesterday.

In other markets, 10-year Treasury note yields fell 8 basis points, or 0.08 percentage point, to 4.47 percent, the lowest in more than five months. Crude oil gained 65 cents, or 0.9 percent, to $75.73 a barrel in New York, reaching a one-month high on expectations a report tomorrow will show U.S. fuel inventories declined.

The Russell 2000 Index, a benchmark for companies with a median market value of $648 million, slipped 1.3 percent to 790.46. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, erased yesterday's gain, losing 1.1 percent to 14,846.39. Based on its decline, the value of stocks fell $201.1 billion.

Altria Group Inc. (MO US)
Apple Inc. (AAPL US)
Assurant Inc. (AIZ US)
Citigroup Inc. (C US)
Credit Suisse Group (CS US)
Costco Wholesale Corp. (COST US)
Deutsche Bank AG (DB US)
Forest Laboratories Inc. (FRX US)
Guess? Inc. (GES US)
D.R. Horton Inc. (DHI US)
Lehman Brothers Holdings Inc. (LEH US)
Lennar Corp. (LEN US)
Microsoft Corp. (MSFT US)
Morgan Stanley (MS US)
Tyson Foods Inc. (TSN US)

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

Last Updated: September 5, 2007 17:42 EDT