US STOCKS-Financial fears, soaring inflation hit Wall St

* Financials lead mkt lower on renewed credit worries

* Writedowns seen at Lehman Brothers, AIG stock view cut

* Higher-than-expected July inflation weighs on sentiment

* Dow off 1.1 pct, Nasdaq off 1.2 pct, S&P down 0.9 pct (Updates to midday)

By Walter Brandimarte

NEW YORK, Aug 19 (Reuters) - U.S. stocks fell more than 1 percent on Tuesday as financial shares declined on renewed credit worries and a report showed inflation is still a threat to the economy, despite the economic slowdown.

Shares of financial companies were the biggest drag on the Dow and the S&P 500, with Bank of America (BAK.N: Quote, Profile, Research, Stock Buzz) and Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) sliding about 4 percent each and the KBW index of bank stocks .BKX falling 4.1 percent.

Reminding investors that the effects of the housing slump are still far from over, JPMorgan Securities forecast investment bank Lehman Brothers LEH.N will take a further $4 billion of write-downs in the third quarter due to losses from mortgage-related investments. [ID:nBNG259145]

Goldman Sachs added to the gloomy outlook as it downgraded the price target for the stock of American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), saying the potential for capital raisings and rating downgrades is increasingly likely for the world's largest insurer. [ID:nBNG323742]

"We are back to struggling again, in the financial sector particularly," said William Stone, chief investment strategist at PNC Financial in Philadelphia. "Underneath some of that is just concern about the overall global economic slowdown."

The Dow Jones industrial average .DJI fell 130.35 points, or 1.14 percent, to 11,349.04, while the Standard & Poor's 500 Index .SPX declined 12.01 points, or 0.94 percent, to 1,266.59, after earlier falling more than 1 percent to a session low at 1,263.53. The Nasdaq Composite Index .IXIC shed 29.30 points, or 1.21 percent, to 2,387.68.

A much higher-than-expected inflation reading for July also scared some investors who fear the U.S. Federal Reserve might be in an increasingly difficult position to maintain its policy of low interest rates.

The government's Producer Price Index shot up at the fastest annual rate in 27 years in July, while core producer prices, excluding volatile food and energy prices, underwent their fastest rise since November 2006. [ID:nN19188178]

"Clearly, there is more resilience in the prices than we thought and I think this is reflecting a pass-through from the strength we had seen in commodity prices," said Anna Piretti, senior economist with BNP Paribas in New York.

She said, however, that the weakness in domestic demand should contain prices going forward.

"Consumers are not likely to make very large ticket purchases when prospects in the labor market are weakening and confidence remains very low."  Continued...