U.S. Stocks Drop On Greenspan Comments, Subprime

NEW YORK (MarketWatch) -- U.S. stocks on Monday extended losses into a second day as Moody's Investors Services warned it could lower bond insurer credit ratings because of subprime losses and Alan Greenspan warned of a possible U.S. recession.

"Slow growth and higher non-energy-related prices could be a relevant conversation in 2008," said Kevin Giddis, managing director at Morgan Keegan & Company Inc.

The Dow Jones Industrial Average was off 71.3 points at 13,269.1, with 21 of its 30 components trading lower, led by Caterpillar Inc. , was down 2.3% following its downgrade to underweight from equal-weight by Morgan Stanley.

Citigroup Inc. recently led the Dow's gains, its stock up 0.9%.

The S&P 500 declined 7.43 points to 1,460.52, while the Nasdaq Composite dropped 24.93 points to 2,610.81.

Volume on the New York Stock Exchange hit 429 shares, and declining stocks outran those advancing by 2 to 1. On the Nasdaq, 571 million shares exchanged hands, and decliners outpaced advancing stocks, also 2 to 1.

Data before the start of trading showed the New York Federal Reserve Bank reporting factory growth in the region slowed in December to its lowest reading since May.

And the Commerce Department said the U.S. current account deficit narrowed in the third quarter to $178.5 billion, or 5.1%, of gross domestic product. .

U.S. stocks closed sharply lower on Friday, as rising inflation dismayed investors already concerned that credit-market turbulence may prompt a recession. The Dow industrials fell 178 points, the S&P 500 lost 20 points and the Nasdaq Composite fell 32 points.

Moody's on late Friday warned that the Triple-A ratings of four leading bond insurers could be downgraded after it reviews the companies' exposure to potential subprime mortgage losses.

The AAA ratings of Financial Guaranty Insurance Company , partly owned by private-equity giant Blackstone Group LP and XL Capital Assurance, a unit of Security Capital Assurance were placed on review, while the ratings of MBIA Inc. were affirmed, but the rating outlooks changed to negative. .

In televised interviews Sunday, Greenspan, former chairman of the Federal Reserve, warned of the possibility of stagflation, when prices rise at the same time as the economy cools, and said there was a 50-50 chance of a U.S. recession.

M&A

The market's bearish tone persisted amid a spree of deals, including agreements by Chicago insurer Aon Corp. to sell two businesses for $2.75 billion. .

And, Ingersoll-Rand Company Ltd. said it would acquire air conditioning systems provider Trane Inc. for $10.1 billion in cash and stock. .

Another corporate divestiture involves Plains Exploration & Production Co.'s plan to sell $1.75 billion in energy assets to Occidental Petroleum Corp. and XTO Energy Inc. . .

Overseas activity included word from Air France-KLM that it has made a non-binding offer to acquire struggling Italian airline Alitalia . .

Overseas

In Europe, shares fell as worries about rising inflation coincided with mounting credit-market turmoil. .

Asian stocks fell, with Japan's Nikkei Stock Average losing ground as banking shares declined. Australian markets faced heavy selling pressure from commodity stocks. .

By Kate Gibson