* Financial stocks sink on fears of dividend cuts
* Merrill falls on market speculation of more write-downs
* Surge in crude oil prices adds strain on Wall Street
(Updates to midday)
By Deborah Jian Lee
NEW YORK, June 20 (Reuters) - U.S. stocks fell sharply on
Friday as financial shares slid after several brokerages warned
of the likelihood of more dividend cuts and mortgage-related
write-downs at U.S. banks.
A spike in crude oil prices, after tumbling 3.5 percent on
Thursday, added to investor jitters about inflation and
consumer spending. All the major indexes fell more than 1
percent.
Investors dumped commercial bank shares after Merrill Lynch
said it sees dividend cuts at Bank of America <BAC.N>, Regions
Financial <RF.N>, SunTrust Banks <STI.N> and Wachovia <WB.N>.
Shares of Merrill and other investment banks also took a
hit as rumors circulated among traders that Merrill may give a
profit warning <MER.N> and take additional write-downs on its
mortgage holdings.
Merrill's stock fell 3.5 percent to $36.38. A Merrill Lynch
spokeswoman declined to comment.
"Couple oil with all the financial concerns coming back to
light and you have all the fixings for a down day," said Edward
Bretschger, director of equity sales and trading at Calyon
Securities in New York.
The Dow Jones industrial average <> fell 137.44 points,
or 1.14 percent, to 11,925.65. The Standard & Poor's 500 Index
<.SPX> slipped 16.28 points, or 1.21 percent, to 1,326.55. The
Nasdaq Composite Index <> dropped 45.72 points, or 1.86
percent, to 2,416.34.
The rumors on Merrill dragged on other investment banks,
with Lehman Brothers Holdings Inc <LEH.N> shares down 2.7
percent to $23.79 and Morgan Stanley <MS.N> shares down 2.9
percent to $39.03.
In addition, two Wall Street investment banks cut their
earnings estimates for the current quarter on home finance
companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, citing
persistent erosion in U.S. housing and mortgage credit.
Shares of Fannie Mae, the No. 1 mortgage finance company,
lost 3.9 percent to $24.02, while shares of Freddie Mac slumped
5.5 percent to $22.35.
Short sellers targeted financial stocks in particular.
Short interest in both Washington Mutual <WM.N>, the
largest U.S. savings and loan, and top insurer American
International Group <AIG.N> climbed more than 23 percent. Short
interest in shares of Switzerland's UBS <UBS.N> nearly
doubled.
AIG shares declined 1.7 percent to $32.51 on the New York
Stock Exchange. Washington Mutual stock was down 0.5 percent at
$6.32.
Among bank shares, SunTrust lost 2.3 percent to $34.50, and
Wachovia shed 2.3 to $17.37, while Regions Financial rose 2.2
percent to $11.42 and all in NYSE trading.
Shares of Yahoo Inc <YHOO.O> fell more than 3 percent as
reports of a brain drain raised fresh worries about the future
of the Web company after it chose to partner with Google Inc
<GOOG.O> instead of Microsoft Corp <MSFT.O>.
The price of oil <CLc1> rose more than 2 percent, buoyed by
China's decision to raise fuel prices and nervousness over
tensions between Israel and Iran.
(Editing by Leslie Adler)
