March 15 (Bloomberg) -- The Standard & Poor's 500 Index fell for a third week after a cash crisis at Bear Stearns Cos. overshadowed the U.S. stock market's biggest one-day rally in five years.

Bear Stearns tumbled 57 percent after the Federal Reserve Bank of New York and JPMorgan Chase & Co. yesterday gave the fifth-largest U.S. securities firm a 28-day lifeline. Financial shares in the S&P 500, which rose the most in eight years after the Fed announced additional measures to help banks cope with mortgage losses, fell 1.9 percent.

``This whole thing is a vicious cycle that could be longer than anyone expects,'' said Eugene Sit, who manages about $7 billion at Sit Investment Associates in Minneapolis. ``The fears are the economy will be significantly impacted and earnings will be lower than most people imagine.''

The S&P 500 retreated 0.4 percent to 1,288.14 for the entire week following yesterday's 2.1 percent drop. Its 3.7 percent rally on March 11 from an 18-month low was sparked by the Fed's expansion of its securities lending program, a move aimed at encouraging banks to extend credit to customers.

The Dow Jones Industrial Average gained 0.5 percent to 11,951.09 led by Caterpillar Inc., which boosted its sales forecast for 2010. The Russell 2000 Index, a measure of companies with a median market value 95 percent less than the S&P 500's, rose 0.4 percent to 662.90.

Nine-Year Low

Bear Stearns, whose shares rose to a record $171.51 in January 2007, yesterday fell 47 percent to a nine-year low of October 1998. That was the company's biggest one-day loss ever. Trading volume of 187 million shares yesterday was 14 times the three-month daily average.

The second-biggest underwriter of U.S. mortgage bonds and one of the most active traders said its cash position had ``significantly deteriorated.'' Earlier in the week, Bear Stearns Chief Executive Officer Alan Schwartz said the 85-year-old firm's ``liquidity cushion'' was sufficient.

``Many investors don't understand or appreciate what leverage and derivatives and liquidity amount to in a tangible sense,'' said Jack Ablin, chief investment officer of Harris Private Bank in Chicago, which oversees $64 billion. ``Seeing a major Wall Street firm run out of capital, it would appear this intangible news is starting to hit home.''

Ambac, Lehman

Bear Stearns led the 12-member Amex Broker/Dealer Index's 7.2 percent drop to the lowest level since June 2005. Ambac Financial Group Inc. fell 35 percent to $6.22. Lehman Brothers Holdings Inc., the largest underwriter of mortgage-backed bonds, slumped 15 percent to a three-year low of $39.26. It had the second-biggest decline in the Amex index. Lehman got a $2 billion, three-year credit line from 40 banks yesterday.

The Chicago Board Options Exchange Volatility Index, the benchmark for U.S. options prices, added 13 percent to a five- year high of 31.16. The so-called VIX is a measure of how much investors are paying to insure against stock-price losses.

Options traders increased bets that Bear Stearns will collapse. Implied volatility, a measure of contract prices, surged past 300 for the New York-based securities firm. That's a level Ambac and Thornburg Mortgage Inc. reached this year as investors sold stock on concern the companies may fail.

Four of the five biggest securities firms by market value, including Bear Stearns and Lehman Brothers, report first-quarter results next week. Bear Stearns yesterday moved up its announcement, originally scheduled for March 20, to March 17. Lehman and Goldman Sachs Group Inc. report March 18, while Morgan Stanley reports March 19.

Treasuries, Dollar

Treasury yields and the dollar tumbled as traders priced in higher odds that the Fed, whose next scheduled monetary policy meeting is March 18, will lower the benchmark interest rate by as much as a full percentage point to 2 percent after five reductions since September.

The two-year note's yield closed below 1.50 percent for the first time since March 2004, and the 10-year note's yield fell to 3.44 percent, within 0.01 percentage point of the lowest since June 2003.

``The Fed is showing creativity and is prepared to do more,'' said Quincy Krosby, chief investment strategist at the Hartford in Hartford, Connecticut, which managed $427 billion at the end of last year.

Interest-rate futures yesterday priced in 56 percent odds of a full-point rate cut, up from zero percent the previous day. The remaining bets are for a 0.75 percentage point reduction. A government report to be released March 18 is forecast to show new home construction fell to an almost 17-year low in February.

Fed Plan

The central bank sparked a 7.4 percent rally in S&P 500 financial shares on March 11 with its plan to lend Treasury securities to financial institutions in exchange for mortgage- backed bonds. The Fed coordinated the effort with central banks in Europe and Canada. It was the latest in a series of measures, beginning in December, designed to spur trading of debt securities other than Treasuries, which lower interest rates had failed to do.

``As bad as it all is, the fact that we're seeing a little government intervention and the market anticipates more bodes well,'' said Wayne Wilbanks, chief investment officer of Wilbanks Smith & Thomas Asset Management LLC in Norfolk, Virginia, which oversees $1.3 billion.

Humana Inc. and Wellpoint Inc. led the S&P 500 Health Care Providers & Services Index to a 13 percent plunge, the biggest- ever loss for the 18-year-old measure.

Humana, the second-largest seller of Medicare drug plans, fell 31 percent to $43.98 for the No. 3 decline in the S&P 500. Wellpoint, the second-biggest U.S. health insurer, retreated 30 percent to $47.09.

Newmont Mining Corp. led materials companies in the S&P 500 to a 3.2 percent advance as the dollar's slump stoked demand for alternative stores of value including gold. Newmont gained 8.2 percent to $53.63.

The dollar index sank to a record low against the euro and the weakest in 12 years against the yen. Gold exceeded $1,000 an ounce for the first time. Crude oil rose to a record $111 a barrel.

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

Last Updated: March 15, 2008 09:19 EDT