* U.S. stocks fall on AIG's big loss; Wal-Mart sales miss
* Euro at seven week-low vs dollar; ECB keeps rates steady
* Government debt rallies on renewed safe-haven bid
(Updates to close of U.S. markets)
By Herbert Lash
NEW YORK, Aug 7 (Reuters) - Wall Street tumbled on Thursday
on ample signs of economic and corporate profit deterioration,
a view that revived a safe-haven bid for government bonds.
Long maturity U.S. Treasury bonds headed for their
strongest day in four years, propelled by a report depicting a
tough U.S. job market, easing inflation concerns and a strong
auction of 30-year government debt.
Oil rose on expectations that a pipeline that carries one
million barrels of crude per day, or more than 1 percent of
world supply, could be shut for up to two weeks after Kurdish
separatists in Turkey attacked it.
The euro slid to a new seven week-low against the dollar
after the European Central Bank left interest rates unchanged,
as expected. The dollar index rose to a 5-1/2-month high after
a surprise rise in the U.S. pending home sales index for June.
A slew of major banks in Europe reported lower profits,
took more write-downs on risky assets and braced for tough
times well into 2009. Difficult conditions will persist but a
few banks were also optimistic that opportunities would arise
from the turmoil, helping send some bank shares higher.
In the United States, a big loss at insurer American
International Group <AIG.N> rattled investors and Wal-Mart
Stores Inc <WMT.N> missed July sales forecasts, heightening
concerns about consumer spending and the profit outlook.
A government report showing the number of Americans in the
latest week filing for jobless benefits jumped to the highest
in more than six years also made investors skittish.
"Today we're facing a host of news reports which do not
bode well for stocks prices. AIG is still in the eye of the
storm and then you have Wal-Mart and jobless claims which added
to the lack of enthusiasm for stocks," said Steve Goldman,
market strategist at Weeden & Co in Greenwich, Connecticut.
Late in the session, Moody's Investors Services said it
placed the A1 credit rating of American Express <AXP.N> on
review for a possible downgrade, further unnerving investors.
The mood in the financial sector soured after AIG posted a
third consecutive quarterly loss after more write-downs. AIG's
shares had their worst day in more than two decades.
Citigroup <C.N> added to the unease after the bank agreed
to buy back more than $7 billion of illiquid auction-rate
securities to settle charges it misled investors about the
debt's risk. Citigroup shares fell more than 6 percent.
Shares of AIG, the world's largest insurance company, fell
18 percent to $23.84, their biggest fall in more than two
decades. Wal-Mart shares declined more than 6 percent.
The S&P financial services <.GSPF> index dropped 5 percent
while the retail sector <.RLX> index fell more than 2 percent.
The Dow Jones industrial average <> closed down 224.64.
points, or 1.93 percent, at 11,431.43. The Standard & Poor's
500 Index <.SPX> fell 23.11 points, or 1.79 percent, at
1,266.08. The Nasdaq Composite Index <> fell 22.64 points,
or 0.95 percent, at 2,355.73.
In Europe, Britain's Barclays <BARC.L>, Germany's Dresdner
<ALVG.DE> and Belgian KBC <KBC.BR> unveiled more than $5
billion in further asset write-downs. Since the credit crisis
began a year ago, banks around the world have lost more than
$400 billion from exposure to risky assets.
The FTSEurofirst 300 index <> of top European shares
ended down 0.25 percent at 1,190.06.
Not all the news was dreary. Barclays was among the top
gainers in the European banking sector, rising 1.6 percent
after the company beat expectations, despite write-downs.
"Generally, the overall tone of the banks had been better.
I think not just in the UK but in America too," said Mike
Lenhoff, chief strategist and head of research at Brewin
Dolphin in London.
"They haven't been quite as dismal as you might have been
led to believe on the back of all the things we know have been
going on," he said.
ECB President Jean-Claude Trichet said risks to economic
growth were starting to materialize, leading investors to rule
out more euro zone rate rises this year and the euro to
weaken.
A similar view on the other side of the Atlantic took hold,
spurred by a jump in U.S. jobless claims. The Federal Reserve
-- the U.S. central bank -- is seen as unlikely to raise
benchmark interest rates while unemployment is rising.
The two-year Schatz yield <EU2YT=RR> dropped well below the
ECB's 4.25 percent benchmark rate to a session low of 4.077
percent.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
1-3/32 in price to yield 3.93 percent. The 30-year U.S.
Treasury bond <US30YT=RR> gained 2-9/32 to yield 4.55 percent.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.38 percent at 74.585. Against the yen,
the dollar <JPY=> fell 0.30 percent at 109.38
The euro <EUR=> fell 0.58 percent at $1.5323.
U.S. crude <CLc1> settled up $1.44 at $120.02 a barrel,
rebounding from three-month lows, after concerns about
faltering U.S. and European demand helped push oil off a July
11 record of $147.27. London Brent crude <LCOc1> settled 86
cents higher at $117.86.
U.S. gold futures erased initial gains to end lower as the
dollar surged. The December gold contract <GCZ8> settled down
$5.10 at $877.90 an ounce in New York.
Asian stocks fell and government bonds rose on a sense of
gloom among investors about financial sector instability and a
worsening global growth outlook.
Japan's Nikkei share average <> fell about 1 percent
and Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> edged
down 0.14 percent, within sight of a 16-month low plumbed on
Tuesday.
(Reporting by Ellis Mnyandu, Walter Brandimarte, Ellen
Freilich and Gertrude Chavez-Dreyfuss in New York and Ian Chua,
Santosh Menon and Amanda Cooper in London; Editing by James
Dalgleish)
