July 28 (Bloomberg) -- U.S. stocks fell and the Dow Jones Industrial Average lost more than 200 points for the second time in three days after the International Monetary Fund said there is no end in sight to the housing slump.

Merrill Lynch & Co., American International Group Inc. and Fannie Mae led financial shares to a third straight drop as the IMF warned that worsening credit conditions may prolong the economic slowdown. Verizon Communications Inc., the second- largest U.S. phone company, slid to an almost two-year low on a bigger-than-estimated decrease in home-phone lines. Tyson Foods Inc., the second-largest U.S. chicken producer, tumbled the most in six weeks after profit sank 92 percent on higher feed costs.

The Standard & Poor's 500 Index retreated 23.39 points, or 1.9 percent, to 1,234.37, its lowest level since reaching an almost three-year low on July 15. The Dow lost 239.61, or 2.1 percent, to 11,131.08. The Nasdaq Composite Index slipped 46.31, or 2 percent, to 2,264.22. Four stocks fell for each that rose on the New York Stock Exchange.

``We're relatively bearish on financials because even when we get this crisis sorted out, the rebound is going to be muted,'' said Ralph Shive, chief investment officer of 1st Source Corp. Investment Advisors in South Bend, Indiana, which manages $3 billion. ``Everyone wants to declare the crisis over, but it's going to take a long time to dig out of this hole.''

Bearish Forecasts

Half the companies in the S&P 500 that have given outlooks so far say earnings will fall in the third quarter. More than 125 companies in the index report results this week after 236 said second-quarter earnings fell an average 24 percent through July 25.

U.S. stocks dropped last week, resuming a two-month slump, after existing home sales fell more than economists forecast and bond investor Bill Gross predicted $1 trillion of losses for banks and brokerages. All of the 23 developed nations in the MSCI World Index except for Canada experienced bear-market plunges of 20 percent or more since September as credit losses surged and record commodity prices stoked inflation.

The S&P 500 Financials Index lost 4.6 percent today, paring its rebound from a nine-year low on July 15 to 15 percent. The group last week had rallied as much as 30 percent from that low after earnings beat estimates at JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co.

$1 Trillion Prediction

The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. While U.S. policy makers have helped contain the financial losses, ``credit risks remain elevated'' and banks need to raise more capital, the IMF said.

Merrill tumbled 12 percent to an almost 10-year low of $24.33, while Lehman Brothers Holdings Inc. slid 10 percent to $15.27.

Lehman had its earnings estimate cut by Merrill analyst Guy Moszkowski, who said the U.S. securities firm may post a further $2.5 billion writedown on home loans in the third quarter.

Bondholders are demanding the highest interest rates for Wall Street debt since 2000, threatening the industry's business model of acquiring assets with borrowed money.

Lehman has seen borrowing costs for its five-year bonds rise to 7.7 percent, up from 5.2 percent six months ago, the biggest jump of the four largest U.S. securities firms, data compiled by Bloomberg show. In some debt maturities, Merrill's bond yields are even higher.

Fannie, Freddie

Fannie Mae lost 11 percent to $10.31, while Freddie Mac retreated 6.7 percent to $7.72. The two mortgage-finance companies may see their equity wiped out if the U.S. Treasury uses new authority to take over the government sponsored companies.

Legislation aimed at shoring up the housing market, passed by the U.S. Senate in a rare Saturday session, is the most comprehensive package considered by Congress to curb a surge in foreclosures, plunging home prices and market turmoil stemming from the worst housing recession since the Great Depression. U.S. foreclosure filings more than doubled in the second quarter from a year ago.

American International Group Inc., the world's largest insurer, slid 12 percent to $23.96 and led the Dow's retreat.

``We cannot see a sustained market recovery unless we have the financials participate or maybe even lead,'' Randy Bateman, chief investment officer at Huntington Asset Management in Columbus, Ohio, said on Bloomberg Television. Huntington oversees $15 billion.

Verizon, Tyson

Verizon lost 2.5 percent to $33.60 even after profit increased 12 percent on higher wireless revenue. Home-phone lines fell 11 percent to 22.4 million. Total phone lines, including business customers, fell 8.5 percent to 38.3 million. High-speed Internet growth also was slower than some analysts estimated.

Tyson slipped $1.14, or 7 percent, to $15.09. The chicken producer said quarterly profit slumped as surging corn and soybean prices boosted the cost of feeding poultry.

Ryanair Holdings Plc. American depositary receipts tumbled 25 percent, leading declines in 13 of 14 companies in the Amex Airline Index, after profit at Europe's biggest discount airline missed analysts' estimates and oil rebounded from a seven-week low. Crude rose $1.47 to $124.73 after Nigerian militants attacked a pipeline.

Amgen Inc., the world's largest biotechnology company, rose the most in the S&P 500, advancing 12 percent to $60.48 after its experimental osteoporosis drug prevented fractures in a trial.

Kraft Foods Inc., the world's second-largest foodmaker, climbed $1.45, or 4.9 percent, to $30.83 after its net income rose for the first time in four quarters, topping estimates. Kraft increased prices on 90 percent of its foods and beverages and shipments fell less than the company expected.

``The market continues to reward those companies that are able to demonstrate strong earnings,'' said Paul Kandel, a money manager at Sentinel Asset Management in New York, which oversees $5 billion.

`Trough'

The bear market in U.S. stocks will probably ``bottom'' in the next month after oil prices fell, Congress passed legislation to shore up the housing market and bank earnings topped estimates, JPMorgan Chase & Co. said.

So-called technical indicators including relative strength indexes, moving averages, short interest and sentiment surveys also signal the S&P 500 won't extend a 22 percent decline from its October record, Thomas Lee, JPMorgan's chief U.S. equity strategist, wrote in a note to clients today.

``Our analysis suggests this low is consistent with a trough,'' wrote Lee, 39, who reiterated his year-end S&P 500 target of 1,450, a 15 percent gain from last week's close. ``We believe equity markets will grind their way higher from here.''

Forecasts In Doubt

The S&P 500 will rise 21 percent from its July 15 low to 1,473 this year, according to the average of nine strategists tracked by Bloomberg. While the index rose 3.5 percent from July 15 to July 25, gains have proved short-lived 10 times during the four U.S. bear markets since 1973.

Predictions that corporate earnings will be the catalyst for a bull market this year are losing credibility as companies make bearish forecasts.

Black & Decker Corp., the largest maker of power tools, cut its 2008 estimate July 25, citing a slump in U.S. homebuilding that is lasting longer than analysts expected. Kimberly-Clark Corp. failed to anticipate pulp and oil costs that were twice its original projection. Of the 63 Standard & Poor's 500 Index companies that provided outlooks this quarter, 30 said profits will fall, data compiled by Bloomberg show.

`Any Excuse'

``Investors are desperately seeking a bottom here and any excuse they can find they're going to declare one, but I don't think we're out of the woods yet,'' said James Gaul, a money manager at Boston Advisors LLC in Boston, which manages $2 billion.

Stocks have declined since October as financial institutions worldwide suffered $468.5 billion in writedowns and credit losses stemming from the collapse of the subprime mortgage market. That prompted economists to forecast 1.5 percent growth in the U.S. economy in 2008, the slowest since 2001. Equities also suffered as inflation increased, giving the U.S. consumer price index the steepest gain since 1991.

The second quarter is poised to mark the fourth straight quarter of declining profits for S&P 500 companies. Earnings have decreased 93 percent at financial firms, 36 percent at companies that depend on discretionary consumer spending and an average 1.2 percent at commodities producers.

Indexes of all 10 industry groups in the S&P 500 have fallen this year, led by a 32 percent tumble in financial shares. Commodities companies have fared the best, dropping 7.2 percent.

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

Last Updated: July 28, 2008 16:43 EDT