Oct. 27 (Bloomberg) -- The cost to protect against default by U.S. insurers including Prudential Financial Inc. and Hartford Financial Services Group Inc. dropped the most in two weeks as the Treasury considered taking stakes in the industry.

Credit-default swaps on Newark, New Jersey-based Prudential plunged 321 basis points to 538 basis points, according to CMA Datavision. Contracts on Hartford fell 230 to 440 and New York- based MetLife Inc. declined 120 to 446.

The government is considering buying the stakes as it prepares a new round of capital injections for financial companies, a person briefed on the plan said last week. An initial $125 billion from Congress' $700 billion financial rescue package was allocated last week to buy shares in nine of the largest U.S. banks and another $125 billion was set aside for small lenders.

Credit-default swaps on the insurers have been trading at or near distressed levels amid concern that the financial crisis is saddling their investment portfolios with losses. Fitch Ratings on Oct. 16 said insurers and reinsurers in the U.S., Europe and Japan face a rising risk of downgrades because of ``unprecedented'' volatility in credit and equity markets that is causing investment losses for the firms.

The government seizure of American International Group Inc. last month also sparked fears that even the industry's biggest companies aren't immune from failure.

Contracts on Allstate Corp. fell 107 basis points to 218 basis points, CMA data show. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

A broader gauge of corporate credit risk also fell today, signaling an improvement in investor confidence. The Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, fell 2.5 basis points to 222.5 basis points as of 9:22 a.m. in New York, according to broker Phoenix Partners Group.

In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 1 basis point to 174, JPMorgan Chase & Co. prices show.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net;

Last Updated: October 27, 2008 09:45 EDT