US STOCKS-Financial shares roil Wall St on credit worry

* Financials led by Fannie, Freddie

* U.S. rescue would hurt GSEs' shareholders

* Jitters over possible big loss by Lehman--newspaper

* Dow off 0.5 pct, S&P 500 of 0.4 pct, Nasdaq off 0.3 pct (Updates to early morning)

By Ellis Mnyandu

NEW YORK, Aug 18 (Reuters) - U.S. stocks fell on Monday as investors fretted about the prospect of more losses from the mortgage crisis, sending shares of the two big U.S. home finance providers and other financial companies lower.

Investors were hit with a one-two punch from news pointing to no let up in the credit crisis stemming from the U.S. housing slump.

Shares of mortgage buyers Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) each fell more than 10 percent following a Barron's newspaper report that the U.S. Treasury is increasingly likely to recapitalize the beleaguered companies, a move that will potentially would dilute the value of stock holdings.

The S&P financial index .GSPF fell nearly 2 percent.

The Wall Street Journal reported that some analysts are girding for investment bank Lehman Brothers LEH.N to announce a third-quarter loss of $1.8 billion or more. Its stock declined 2 percent. For details, see [ID:nN17380162]

"We are still in the throes of the credit crisis," said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut. "There's risk that Fannie Mae and Freddie Mac may require capital from the government. Those companies are what's at issue."

The Dow Jones industrial average .DJI slid 59.19 points, or 0.51 percent, to 11,600.71. The Standard & Poor's 500 Index .SPX declined 5.70 points, or 0.44 percent, to 1,292.50. The Nasdaq Composite Index .IXIC dropped 11.52 points, or 0.47 percent, to 2,441.00.

Freddie Mac shares declined to $5.22 on the New York Stock Exchange, while those of Fannie Mae slid to $7.03. Merrill Lynch slashed its price target on Freddie Mac to $5.75.

Lehman Brothers shares declined to $15.84. According to the Wall Street Journal, if losses keep piling up, Lehman could need to raise additional capital beyond the $6 billion it got in June.

Shares of Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz), the No. 2 U.S. bank, fell 3.1 percent to $29.74 on the NYSE, making the stock the top S&P 500 drag.

Technology services company International Business Machines (IBM.N: Quote, Profile, Research, Stock Buzz) was a top drag on the Dow, falling nearly 1 percent to $125.26. On Nasdaq, shares of Google (GOOG.O: Quote, Profile, Research, Stock Buzz), the Web search company, fell 1.2 percent to $504.06.  Continued...