US STOCKS-AIG, Wal-Mart weigh on Wal St; Nasdaq inches up

                                
 * AIG, Wal-Mart, Citigroup weigh on Wall Street
                                
 * Jobless claims point to labor market weakness
                                
 * Dow off 1 pct; S&P 500 off 0.6 pct, Nasdaq down 0.2 pct
 (Updates to midday)
                                
 By Walter Brandimarte
                                
 NEW YORK, Aug 7 (Reuters) - U.S. stocks fell on Thursday as
insurer American International Group and Citigroup weighed on
the financial sector, while lower-than-expected July sales by
Wal-Mart Stores Inc raised concerns about consumer spending and
profit outlook.
                                
 Shares of AIG <AIG.N> sank 17.5 percent, their biggest fall
in more than two decades, as the world's largest insurer posted
its third consecutive quarterly loss. Wal-Mart's stock <WMT.N>
fell 4.9 percent.
                                
 Also weighing on the financial sector was Citigroup <C.N>,
which dropped 3.6 percent after the bank agreed to buy back
more than $7 billion of illiquid auction-rate securities,
settling charges the largest U.S. bank marketed the debt
fraudulently. For details, see [ID:nN07477337].
                                
 In a sign of economic slowing, a government report showed
the number of people filing for first-time jobless benefits in
the latest week jumped to the highest level in more than six
years.
                                
 "We still believe that there is weakness in the economy;
however, there is also inflation," said Rob Stein, managing
partner of Chicago-based Astor Asset Management.
                                
 "This morning's numbers on jobless claims continued to
support the thesis that job creation is minimal, if not
negative."
                                
 The Dow Jones industrial average <.DJI> was down 112.20
points, or 0.96 percent, at 11,543.87. The Standard & Poor's
500 Index <.SPX> was down 10.66 points, or 0.83 percent, at
1,278.53. The Nasdaq Composite Index <.IXIC> was down 3.01
points, or 0.13 percent, at 2,375.36.
                                
 AIG also reported a general deterioration in its mainstream insurance business. Investors, who had driven stocks higher
for two days, took the AIG news as suggesting that fallout from
the credit crisis, spawned by the U.S. housing slump, was far
from over.
                                
 "AIG has dampened the recent momentum," said Andre Bakhos,
president of Princeton Financial in Princeton, New Jersey. "The
bears were looking for a reason to sell and AIG provided it."
                                
 News of the Citigroup settlement over the auction-rate debt
"puts pressure on other players like UBS, HSBC, Merrill Lynch,
to do the same thing," said Brian Yelvington, analyst with
CreditSights in New York.
                                
 Wal-Mart's 3 percent rise sales at U.S. stores open at
least a year missed Wall Street estimates and was accompanied
by a cautious forecast for August. [ID:nN07282595]. Its shares
declined to $57.77.
                                
 But on the bright side, shares of home builders inched
higher after a report by the National Association of Realtors
showed U.S. pending home sales unexpectedly rose in June. The
Dow home construction index <.DJUSHB> climbed 1.5 percent.
                                
 U.S. crude oil prices <CLc1> rose about $1 to $119.56 a
barrel, trimming earlier gains of more than $3 a barrel.
 (Additional reporting by Walden Siew; Editing by Kenneth
Barry)