U.S. Stocks Decline On Credit Turmoil; Weekly Losses In Store

NEW YORK (MarketWatch) -- U.S. stocks fell on Friday, with the major indexes headed towards weekly losses, as the financial sector spouted more leaks after American International Group Inc. reported a $7.8 billion loss and Citigroup Inc. unveiled plans to shed about half a trillion dollars in assets.

"AIG is a reminder that while the bulk of the stock market is in good shape, the financials and consumer discretionary stocks are still having some difficulties," said Phil Orlando, equity market strategist at Federated Investors.

Positioned for a weekly loss, the Dow Jones Industrial Average was recently off 139.14 points, or 1.1%, to 12,727.64. The Dow is down more than 330 points, or 2.5%, from last Friday's close.

Of the Dow's 30 components, 26 were posting declines, with the blue-chip losses led by AIG down 8.4%, following its larger-than-forecast loss, which led Standard & Poor's and Fitch to cut the insurance giant's credit rating. .

Also weighing on the Dow was Citigroup , off 1.8% on word the banking institution would sell or downsize pieces of its sprawling empire. .

The broader indexes were also lower, and headed for weekly declines, with the S&P 500 shedding 11.54 points, or 0.8%, to 1,386.14, readying it for a weekly loss of 2%.

Materials led S&P sector declines, off 1.5%, followed by consumer staples, down 1.1% and energy, down 1%.

And, with no end in sight to strong demand for diesel fuel and worries about global supplies, crude-oil futures gained $2.19 to $125.88 a barrel, after rising to a high of $126.25 a barrel earlier on. .

The rising price of crude is "having a negative impact on consumer spending, with a spike in both crude and food, which is having a destabilizing effect on the GDP as it relates to consumer spending -- it's a wake up call," said Orlando.

And crude isn't the only commodity seeing a price run-up, with last week's devastating cyclone in Myanmar adding to concern about supplies of rice, given the country is among the larger producers of paddy rise. .

Only two sectors on the S&P were rising Friday afternoon: telecommunication services, up 0.8%, and utilities, recently ahead 0.7%.

The Nasdaq Composite dropped 10.02 points, or 0.4%, to 2,441.22, readying the technology-laden index for a 1.4% decline for the week.

Volume on the New York Stock Exchange topped 2.3 billion, with declining stocks outgunning advancers about 4 to 3. On the Nasdaq, more than 1.1 billion shares were exchanged, and decliners topped advancers, also by a roughly 4-to-3 ratio.

Trading places

Ahead of the opening bell, stock index futures had trimmed losses after the Commerce Department reported a sharp drop in exports as well as imports, driving the trade deficit down to $58.2 billion. .

U.S. stocks ended higher on Thursday, with better-than-expected April sales by Wal-Mart Stores Inc. and other retailers driving a mild rebound.

Orlando, however, questioned whether investors reacted in an overly optimistic fashion to the results from the discount retailers, saying he wonders "how aggressively they needed to mark down in order to move product, so earnings may not be up to snuff."

"We'll have a better feel by the end of the month," said Orlando.

And, the Financial Times reported Sovereign Bancorp Inc. would raise as much as $2 billion in fresh capital from investors led by Banco Santander SA .

In other financials news, Wachovia Corp. ousted Ken Thompson as chairman, though he will retain his title as chief executive.

Overseas, most Asian markets finished in the red, as worries about inflation weighed.

In Europe, shares were sharply lower as the financial sector came under renewed pressure. .

By Kate Gibson