Fannie, Freddie fears, inflation slam Wall St

By Steven C. Johnson

NEW YORK (Reuters) - U.S. stocks fell for a second straight session on Tuesday as credit worries hit bank shares and a report showing inflation remains a threat despite slower growth stoked the market's anxiety.

Fears that U.S. home finance firms Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) may need a government bailout soured investors on financial shares for a second day even after Freddie had little trouble selling new debt.

Financial companies were the biggest drag on the Dow and the S&P 500, with top mortgage lenders Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) down more than 3 percent each. The KBW index of bank stocks .BKX fell 3.4 percent.

Lehman Brothers LEH.N shares had another dismal day, tumbling 13 percent after JPMorgan Securities forecast that the investment bank will take a further $4 billion in write-downs tied to losses on mortgage-related investments.

Shares of Home Depot (HD.N: Quote, Profile, Research, Stock Buzz), the world's largest home improvement retailer, fell 3.7 percent to $25.96 after the company, a Dow component, forecast weakness into 2009 as the housing slump continues.

"The uncertainty with regard to financials has kept the downward pressure on," said Bucky Hellwig, senior vice president at Morgan Asset Management in Birmingham, Alabama.

"Home prices keep falling, assets continue to deteriorate, the economy continues to slow, which can only worsen the unemployment rate and increase delinquencies," he added. "There's seemingly no end to this cycle, and that's to the detriment of any financial stock."

The Dow Jones industrial average fell 130.84 points, or 1.14 percent, to 11,348.55. The Standard & Poor's 500 Index .SPX slid 11.91 points, or 0.93 percent, to 1,266.69. The Nasdaq Composite Index .IXIC lost 32.62 points, or 1.35 percent, to 2,384.36.

After the closing bell, shares of Hewlett-Packard Co (HPQ.N: Quote, Profile, Research, Stock Buzz) rose about 3 percent to $45 after the world's biggest computer maker reported a higher quarterly profit and strong sales for its notebook computer and printer business.

During the regular session, sectors sensitive to high oil prices generally weakened. The Airline Index shed 7.8 percent.

Oil has declined sharply in recent weeks from a high above $147, but it seems to be consolidating losses in recent days.

U.S. crude oil prices gained $1.66 to settle at $114.53 a barrel, after briefly rising above $116 earlier.

The main focus was on financial stocks. Shares of insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) lost 5.9 percent to $20.32 after Goldman Sachs cut its price target on the stock to $23 from $30.

Lehman Brothers tumbled 13 percent to $13.07.

Bank of America's shares fell 4.2 percent to $28.08 and Wells Fargo shed 3.5 percent to $27.79.  Continued...