FTSE drops 2.4% on renewed credit fears, US data

* FTSE slumps 2.4 pct

* Fears of Fannie Mae, Freddie Mac bailout weighs on banks

* M&A activity buoys Smith & Nephew/Scottish & Southern * U.S. data paints a bleak picture

By Michael Taylor

LONDON, Aug 19 (Reuters) - Britain's blue-chip index fell for the third session in a row to end over 2 percent lower on Tuesday as credit fears and U.S. data dragged financials lower, while a sprinkling of bid activity kept a few stocks afloat.

The FTSE 100 .FTSE shed 129.8 points, or 2.4 percent, to 5,320.4 -- its largest one-day fall in over a month. The UK's benchmark index is down 17 percent for the year to date.

Across the Atlantic, U.S. stocks lost over 1 percent to extend sharp declines overnight, after Barron's said the government may have no choice but to nationalise Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz). This could wipe out existing holders of the two companies' common stock and result in losses for other asset holders.

Former International Monetary Fund chief economist Kenneth Rogoff said the worst of the global financial crisis is yet to come and a large U.S. bank would fail in the next few months as the world's biggest economy hits further troubles. [ID:nSP216950]

UK banks accounted for over 47 negative index points, with Barclays (BARC.L: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz), HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz), Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) down 4.3 to 7.4 percent.

"A lot of people have thought over the course of last few weeks that much of the bad news regarding markets is out in the public domain. That clearly is not the case," said Peter Dixon, UK economist at Commerzbank.

"We saw the comments from Rogoff, suggesting that a major U.S. bank could well go under. That just reawakens investors to the idea that we are by no means over the worst of the crisis."

Insurers were hurt by the knock-on effect, with Standard Life (SL.L: Quote, Profile, Research, Stock Buzz), Old Mutual (OML.L: Quote, Profile, Research, Stock Buzz), Prudential (PRU.L: Quote, Profile, Research, Stock Buzz), Aviva (AV.L: Quote, Profile, Research, Stock Buzz) and Legal & General (LGEN.L: Quote, Profile, Research, Stock Buzz) losing between 6.1 and 7 percent.

Adding to the negative sentiment, the U.S. government's Producer Price Index shot up at the fastest annual rate in 27 years, while core producer prices, excluding volatile food and energy, notched up their fastest rise since November 2006.

"Grabbing the headlines today is the scorching hot PPI numbers," said David Evans, market analyst at BetOnMarkets.com. "This figure should cool in the short term as commodities have come off the boil of late, especially oil, but the medium term outlook looks very bleak."

Builders and real-estate companies dragged the FTSE 100 deeper into the red, as data pointed to the slowest start rate in U.S. home building in more than 17 years. [ID:nN19188178]  Continued...