Aug. 31 (Bloomberg) -- U.S. stocks extended a worldwide drop, with the Standard & Poor’s 500 Index trimming a sixth straight monthly gain, amid concern the global rally in equities has outpaced the prospects for an economic recovery.

China led the slump as the Shanghai Composite Index tumbled 6.7 percent, the most since June 2008, on concern a slowdown in lending will stifle growth. Freeport-McMoRan Copper & Gold Inc. and Exxon Mobil Corp. dropped as copper plunged the most in two months and oil fell below $70 a barrel. American International Group Inc., the insurer rescued by the U.S., tumbled 9.8 percent to lead the S&P 500 lower on concern the shares are expensive.

The S&P 500 lost 0.8 percent to 1,020.62 at 4:07 p.m. in New York. The Dow Jones Industrial Average retreated 47.92 points, or 0.5 percent, to 9,496.28. The MSCI World Index of 23 developed nations slid 0.8 percent. Five stocks fell for each that rose on the New York Stock Exchange, the broadest sell-off in two weeks.

“China and the U.S. are very economically linked right now,” said Michael Binger, a Minneapolis-based fund manager at Thrivent Asset Management, which oversees about $60 billion. “The stock markets are going to move together.”

Speculation that lending curbs in China will damp growth in the world’s third-largest economy pushed the MSCI Asia Pacific Index to a 0.5 percent retreat. U.S. energy, raw-material and consumer companies fell the most among 10 groups in the S&P 500 today, each losing at least 1.4 percent collectively.

Six-Month Rally

The S&P 500 added 3.4 percent in August and the Dow climbed 3.5 percent as reports from consumer confidence to home sales topped economists’ forecasts. Financial stocks had the biggest gains this month, with the S&P 500’s second-largest industry rising 13 percent. That’s three times the August advance for industrial shares, which had the month’s second-steepest gain.

The S&P 500 has advanced for the past six months, the longest stretch of gains since January 2007. September is historically the worst month for U.S. stocks, with the benchmark index losing 1.3 percent on average since 1928, according to data compiled by Bloomberg.

Stocks declined even after Walt Disney Co. said it would buy Marvel Entertainment Inc., Baker Hughes Inc. agreed to acquire BJ Services Co. and a report from the Institute for Supply Management-Chicago Inc. showing improving business activity added to signs the economy is recovering.

Disney sank 3 percent to $26.04. The theme-park operator agreed to buy Marvel for about $4 billion in cash and stock, adding comic-book characters Iron Man and Spider-Man to Disney’s lineup of princesses and live-action stars. Marvel soared 25 percent to $48.37, the most in the Russell 1000 Index.

Oilfield M&A

Baker Hughes declined the most since December, losing 9.6 percent to $34.45. The world’s third-largest oilfield-services provider said it would pay $5.5 billion for BJ Services, a bet on U.S. natural-gas shale formations. The takeover is the largest oilfield-services company takeover since 1998. BJ Services rose 4.1 percent to $16.06.

Alcoa Inc., the largest U.S. aluminum producer, dropped 3.6 percent to $12.05 for the biggest decline in the Dow. Freeport- McMoRan fell 3.8 percent to $62.98. Exxon slid 1.4 percent to $69.15. The Reuters/Jefferies CRB Index of 19 of commodity prices declined 1.6 percent, led by drops in gasoline, heating oil and crude oil.

AIG fell for the first time in 10 days, tumbling 9.8 percent to $45.33. Andrew Bary at Barron’s called the stock “overpriced,” while Bloomberg columnist David Pauly said the share rally this month “may not make sense.” The shares more than tripled in August.

Morgan Stanley Downgrade

Morgan Stanley retreated 1.9 percent to $28.96. Bank of America analyst Guy Moszkowski cut the sixth-biggest U.S. bank by assets to “neutral” from “buy” because compensation costs are rising and the shares are “no longer deeply undervalued.”

Financial stocks in the S&P 500 collectively retreated 0.4 percent. German Chancellor Angela Merkel and French President Nicolas Sarkozy said at a news conference in Berlin that they will press fellow Group of 20 leaders to agree on rules limiting bonus payments and address the challenge of banks becoming “too large.”

Europe’s Stoxx 600 fell 0.6 percent, reducing its monthly advance to 4.9 percent. The rally has driven the price-earnings ratio for the index up to 48.6, the highest level since June 2003, according to weekly data compiled by Bloomberg. Trading in London was closed for a holiday.

‘Too Early’

“There was more breadth to the global downturn than we’ve ever seen so it’s going to be very difficult to re-start the broader global economy,” said Stephen Roach, chairman of Morgan Stanley Asia Ltd., in an interview on Bloomberg Television. “It’s too early to put all this behind us.”

The Shanghai Composite has slumped 23 percent to 2,667.75 since Aug. 4, more than the 20 percent drop that is the common definition of a bear market. China’s gauge is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.

China’s economy isn’t “sustainable” and the Shanghai Composite “should be 2,000 or less,” former Morgan Stanley Asian economist Andy Xie said in a Bloomberg Television interview. He added that China’s market remains “in bubble territory.”

Mutual funds, pensions and endowments are unloading U.S. consumer stocks at the fastest pace in at least 14 years. Institutions controlling $16.4 trillion sold $1.8 billion more than they bought of department stores, distillers and hoteliers this month, according to data compiled by State Street Corp. As Nordstrom Inc. to Fortune Brands Inc. more than doubled from the market’s low in March, the biggest investors became net sellers, Bloomberg data show.

E*Trade Financial Corp., the online brokerage that’s been unprofitable for two years, jumped 7.3 percent to $1.76 for the S&P 500’s biggest gain. Citadel Investment Group LLC, E*Trade’s largest shareholder, dropped plans to sell as many as 120 million shares.

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net.

Last Updated: August 31, 2009 16:30 EDT