US STOCKS-Fannie, Freddie worries cause stocks to swoon

* Financials fall, led by Fannie, Freddie * U.S. rescue would hurt GSEs' shareholders * Jitters over possible big loss by Lehman--newspaper * Home builder sentiment stuck at record low in August * Dow off 1.7 pct, S&P 500 off 1.5 pct, Nasdaq off 1.6 pct (Updates to afternoon)

By Steven C. Johnson

NEW YORK, Aug 18 (Reuters) - U.S. stocks tumbled on Monday as uneasiness about the prospect of more losses from the mortgage crisis bruised shares of banks and the two big U.S. home finance companies.

A one-two punch of gloomy financial news stoked market anxiety, sending all three major indexes down more than 1 percent and reminding investors that the credit crisis and housing slump were far from over.

Mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) each lost 18 percent after a Barron's report suggested the U.S. Treasury may recapitalize the companies, a move that could wipe out shareholders.

The Treasury Department responded by saying it had no plans to backstop either of the two companies, which own or guarantee some $5 trillion in outstanding U.S. mortgage debt, but Freddie shares still dropped to their lowest level since July 15. For details, see [ID:nWAT009920]

Shares of Lehman Brothers fell over 4 percent after the Wall Street Journal reported that analysts are bracing for a third-quarter loss at the investment bank of $1.8 billion or more. For details, see [ID:nN17380162]

The Standard & Poor's Financial Index .GSPF was down 3.3 percent, reversing two consecutive sessions of gains.

Adding to market jitters was a report showing home builder sentiment stuck at a record low in August, battered by ever-tightening lending conditions and a flood of foreclosed homes. For details, see [ID:nNAT004296]

"Investors have been trying to put the housing and credit crisis behind them. They want to believe we're in the eighth or ninth inning, but every time news like this comes up, they have to readjust their thinking," said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois.

The Dow Jones industrial average .DJI was down 196.55 points, or 1.68 percent, at 11,463.35. The Standard & Poor's 500 Index .SPX was down 19.02 points, or 1.47 percent, at 1,279.18. The Nasdaq Composite Index .IXIC was down 39.31 points, or 1.60 percent, at 2,413.21.

U.S. crude oil CLc1 was down 27 cents at $113.50 per barrel, although investors said its price fluctuations were taking a back seat to financial concerns.

"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."

Fannie Mae shares slid 18.2 percent to $6.47, while Freddie Mac shares plummeted 18 percent to $4.80, both on the New York Stock Exchange. Merrill Lynch slashed its price target on Freddie Mac to $5.75.

Lehman Brothers shares declined 4.7 percent to $15.41 on the NYSE. 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, dropped 4.4 percent to $29.37 on the NYSE, while No. 1 U.S. bank Citigroup (C.N: Quote, Profile, Research, Stock Buzz) fell 4.5 percent to $17.73. Both were among the top drags on the S&P.  Continued...