* Inter-bank lending rate spike fuels credit worry
* U.S. extends $85 billion loan for 79.9 pct stake in AIG
* Morgan Stanley, Goldman Sachs tumble
* Dow off 1.3 pct, S&P 500 off 1.4 pct, Nasdaq off 1.2 pct
(Updates to early morning)
By Ellis Mnyandu
NEW YORK, Sept 17 (Reuters) - U.S. stocks slid on Wednesday
as a spike in inter-bank lending rates added to fears of credit
constraints in the global financial system.
Additionally, investors worried the U.S. government rescue
of embattled insurer American International Group <AIG.N>
wouldn't be enough to stem turmoil that has rocked markets.
With AIG now in government hands, investors started
worrying again about who might be the next in the financial
sector to come under strain, sending the S&P financial index
<.GSPF> down 3.4 percent.
Shares of Morgan Stanley <MS.N> slumped more than 14
percent to $24.49 on the New York Stock Exchange after CNBC
television reported that the U.S. investment bank is weighing
whether it should remain independent or merge with a bank. For
details, see []
Shares of Goldman Sachs <GS.N> dropped 9.4 percent to $120
after several brokerages cut their profit outlooks for the
investment bank. Credit constraints could hamper business and
consumer lending.
"The credit crunch and credit contraction is intensifying,"
said Peter Boockvar, equity strategist at Miller Tabak & Co in
New York. "The action in Morgan Stanley in light of what was
better than expected numbers last night is disconcerting."
The Dow Jones industrial average <> fell 139.72 points,
or 1.26 percent, to 10,919.30. The Standard & Poor's 500 Index
<.SPX> dropped 16.44 points, or 1.35 percent, to 1,197.15. The
Nasdaq Composite Index <> declined 26.25 points, or 1.19
percent, to 2,181.65.
The bank-to-bank cost of borrowing overnight dollars fell
more than a percentage point on Wednesday, but the premium paid
for the greenback and sterling over three months swelled,
showing persistent money market strain.
The drop in Morgan Stanley shares came despite the bank's
posting quarterly results after the bell on Tuesday that beat
Wall Street estimates.
Shares of General Electric were down 7.3 percent at $23.22
and were a top drag on the S&P 500. Boeing <BA.N> weighed on
the Dow, with a drop of 4 percent to $59.34 after UBS cut its
price target on the plane maker's stock.
Shares of iPhone and iPod maker Apple Inc <AAPL.O> dropped
2.6 percent to $136.30, making the stock a top drag on the
Nasdaq.
The government agreed on Tuesday to rescue AIG via an
emergency $85 billion loan. AIG shares were off 41 percent at
$2.26 on the NYSE.
Banks frantically seeking dollar funds have been
stonewalled by others increasingly reluctant to lend amid
uncertainty and nervousness following the collapse of Lehman.
(Editing by Kenneth Barry)
