U.S. Stocks Fall As S&P Threatens To Downgrade Ambac, MBI

NEW YORK (MarketWatch) -- U.S stocks continued to slide Wednesday afternoon after Standard & Poor's said it may downgrade its ratings on bond insurers Ambac Financial Group Inc. and MBIA Inc., reflecting more trouble in the credit crisis that has rocked Wall Street and offsetting a mostly positive auction of funds to banks by the Federal Reserve.

Ahead earlier on, the market pulled lower after S&P revised its outlook on Ambac Financial Group and MBIA , said Peter Boockvar, equity strategist at Miller Tabak.

"Everyone is giving different interpretations about the Fed auction, but I think it's much ado about nothing -- a whooping 10 basis points below the discount rate I don't think eases much of anything," said Boockvar.

The Dow Jones Industrial Average was recently off 52.3 at 13,180.1, with 22 of its 30 components trading lower, with Walt Disney Co. fronting the blue-chip's decline, its stock off 2%.

Technology shares were among the Dow's few gainers, with International Business Machine Corp. up 1.2% and Intel Corp. ahead 0.5%.

The S&P 500 fell 5.44 points to 1,449.54, while the Nasdaq Composite fell 4.94 point to 2,591.07.

Volume on the New York Stock Exchange neared 753 million, and declining stocks outran those advancing 3 to 1. On the Nasdaq, nearly 1.1 billion shares exchanged hands, and declining stocks edged ahead of those advancing, also by 3 to 1.

On the New York Mercantile Exchange, crude-oil futures gained $202 to $92.1, while gold futures fell $1.6 to $805.8 an ounce.

Capital needs

In Washington, the Fed said U.S. banks had borrowed $20 billion for 28 days at 4.65%, with a total of 93 banks bidding in Monday's auction, asking for $61.6 billion. The bid-to-cover ratio was 3.08. .

"These results suggest that funding needs are more widespread throughout the banking system, a point that is likely to make the Fed a bit more concerned about the financial system than before the auction," said Drew Matus, an economics at Lehman Brothers.

The scenario "slightly increases the odds of a rate cut at the next FOMC [Federal Open Markets Committee] meeting," said Matus.

Morgan Stanley unveiled a new $5.7 billion write-down on its way to posting a fourth-quarter loss of $3.59 billion, leading CEO John Mack to refuse a bonus. The Wall Street Journal reported that top executives at Bear Stearns will also forgo bonuses this year.

Shares of Morgan Stanley gained 3% while those of Bear Stearns fell 1.8%.

The trend of Asian and Middle Eastern investors taking stakes in Western financials continued, with China Investment Corp. taking a $5 billion Morgan Stanley stake. .

Elsewhere, RealtyTrac reported that November foreclosures were up nearly 68% from a year ago, though down 10% from October. .

On the interest-rate front, minutes from the last Bank of England meeting revealed the U.K. central bank voted unanimously to cut rates, a surprise for economists, who were expecting a closer decision.

After hours

After the close of trading, Nike and Oracle Systems will announce results.

Elsewhere, Palm dropped 8.3% after the handset-devices maker forecast current quarter revenue up to 13% below average analyst estimates.

The Nikkei 225 ended 1.2% lower in Tokyo. In London, the FTSE 100 was flat.

U.S. stocks closed a choppy session with gains on Tuesday, with Best Buy and Adobe Systems closing higher after quarterly reports. The Dow industrials rose 65 points, the S&P 500 ended 9 points higher and the Nasdaq Composite tacked on 21 points.

By Kate Gibson