Dow drops 225 on worries about financial sector

In a sign of the reversal in sentiment, investors ate up $10 billion in new 30-year bonds sold at a government auction.

"The dealers I talk to were shocked by the demand," said Christopher Rupkey, financial economist at Bank of Tokyo-Mitsubishi in New York.

The annualized yield on the bonds: 4.61%.

That normally wouldn't seem like a good deal, but it could be if you think most other investments are too dicey because of the rickety economy. And that's an increasingly global theme.

In Japan, Prime Minister Yasuo Fukuda told Bloomberg News on Thursday, "I myself feel the severe condition of the economy. The slowdown is becoming apparent."

And the latest survey of German business confidence showed sentiment had plunged to levels last seen at the end of the last recession in 2002.

"I think the bond market is showing global concern about the economic situation," said Tony Crescenzi, bond market strategist at Miller, Tabak & Co.

In the latest downbeat report on the U.S. economy, the government said new claims for unemployment benefits surged last week to a six-year high, although the increase stemmed partly from an extension of benefits for people whose payments had run out.

One more sign of the new fear factor: The dollar suddenly is a haven -- at the expense of other currencies. An index of the greenback's value against six major currencies rose for a fifth straight session Thursday to its highest level since February.

The economic news, coupled with lackluster chain-store sales and a mammoth quarterly loss at insurance firm American International Group, helped drive the Dow Jones industrials down 224.64 points, or 1.9%, to 11,431.43.

The decline was the index's sixth triple-digit move in the last two weeks.

The Standard & Poor's 500 index dropped 23.12 points, or 1.8%, to 1,266.07, and the Nasdaq composite index fell 22.64 points, or 1%, to 2,355.73.

The Russell 2,000 index of smaller-company stocks fell 12.49 points, or 1.7%, to 713.41.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange.

Treasury bond yields sank as investors sought the safety of government debt. The yield on the benchmark 10-year Treasury note fell to 3.92% from 4.05% late Wednesday.

Oil prices rebounded after sliding early in the week. Crude futures rose $1.44 to settle at $120.02 in New York.

AIG tumbled $5.25, or 18%, to $23.84 after the company reported its $5.4-billion second-quarter loss, reflecting weakness in the credit markets that erased several billion dollars of value from its portfolio of credit default swaps and other investments.

Other insurance stocks fell after AIG's results came out. Genworth Financial fell $1.62, or 9.9%, to $14.67.

Among other financial stocks, American Express lost $1.59, or 4.2%, to end at $36.40 after Moody's Investors Service said it might downgrade the credit card giant's debt.

Citigroup fell $1.23, or 6.2%, to $18.47 after it agreed to repurchase more than $7 billion in auction-rate securities and pay $100 million in fines. New York state had threatened to charge Citigroup with fraud in its selling of the securities.

Later in the day, Merrill Lynch said it would buy back $10 billion in auction-rate paper. Merrill shares sank $2.40, or 8.4%, to $26.10 before the announcement.

In the retail sector, Wal-Mart Stores dropped $3.80, or 6.3%, to $56.96 after reporting lower-than-expected sales in July.

Other retailers also released disappointing reports. Target fell $2.25, or 4.7%, to $45.76, while Macy's fell 76 cents, or 3.9%, to $18.92.

Overseas, key stock indexes fell 1% in Japan, 0.2% in Britain and 0.3% in Germany. Shares in France rose 0.2%.

tom.petruno@latimes.com

Times wire services were used in compiling this report.