June 3 (Bloomberg) -- State Street Corp., the world's largest money manager for institutions, fell in U.S. trading after the company said it will sell $2.5 billion of stock as a cushion against potential investment losses.

The company declined $1.11, or 1.6 percent, to $69.95 at 8:23 a.m. New York time on electronic markets before the start of regular U.S. trading.

The Boston-based company may be forced to rescue $28.3 billion of debt funds, called conduits, whose holdings of mortgage-backed securities tumbled in value with the global credit markets, said Gerard Cassidy, an analyst at RBC Capital Markets Inc. in Portland, Maine. The off-balance-sheet investment pools carried $1.49 billion in unrealized after-tax losses as of March 31.

``In a benign equity market, I would suspect the shares will open lower in the U.S. due to the dilutive effect of the offering,'' Cassidy said.

The offering will dilute existing investors by about 9 percent, according to a filing yesterday with the U.S. Securities and Exchange Commission. State Street's current market value is $27.8 billion.

State Street fell 9.9 percent on April 15, the most in five years, when it disclosed the conduit markdowns as well as $1.9 billion in unrealized after-tax losses in its $75.4 billion investment portfolio. The stock has since recovered 2.6 percent and ended yesterday at $71.06 in New York Stock Exchange composite trading.

State Street had fallen 12 percent this year as of yesterday, in line with the Standard and Poor's Supercomposite Asset Management & Custody Banks Index.

To contact the reporter on this story:
Christopher Condon in Boston at 
ccondon4@bloomberg.net

Last Updated: June 3, 2008 08:36 EDT