(Adds close of U.S. markets)
* U.S. stocks sag on dim economy outlook, inflation fears
* Dow closes in bear territory-20 pct fall from Oct peak
* Oil rises to record over $144 as U.S. inventories fall
* Dollar slips on signs of U.S. labor market weakness
By Herbert Lash
NEW YORK, July 2 (Reuters) - U.S. stocks tumbled in a
volatile session on Wednesday, as oil's surge to a record over
$144 a barrel and new signs of weakness in both the economy and
for corporate profits pushed the Dow into a bear market.
A drop in U.S. crude inventories to below 300 million
barrels stoked concerns about the supply of oil and pushed U.S.
equity market down sharply. The Dow closed down more than 20
percent below its peak in October -- a threshold at which it is
considered to be in bear market territory.
Adding to a sour mood, U.S. Treasury Secretary Henry
Paulson said high oil prices, further home price declines and
capital markets turmoil will prolong the U.S. downturn.
Coal mining stocks plunged after both physical and swap
prices fell in what traders said was a long-overdue correction
after a sharp run-up in share prices since the start of May.
The Dow Jones coal index <.DJUSCL> of six U.S. coal miners
fell almost 14 percent, the biggest single-day drop in at least
two years. In related moves, two big commodity-linked
companies, Caterpillar Inc <CAT.N> and Alcoa Inc <AA.N>, were
the biggest drags on the Dow. Caterpillar fell 4.3 percent and
Alcoa shed 5.4 percent.
Another depressant for the 30-stock Dow, the shares of
General Motors <GM.N> dropped more than 14 percent after
Merrill Lynch said the struggling automaker will need to raise
$15 billion to shore up liquidity. The brokerage said
bankruptcy was possible if auto sales continue to slump.
After flirting with bear market status since last week,
the Dow industrials closed 20 percent below its October peak of
14,198.10 -- the Street's measure of bear territory.
"This market is not for the faint-hearted right now," said
Kurt Brunner, portfolio manager at Swarthmore Group in
Philadelphia. "I really don't see us getting out of this
quagmire, this dark zone anytime soon."
Brunner cited a dim outlook for corporate profits given
record high oil prices and a slowdown in the global economy.
The Dow Jones industrial average <> fell 166.75 points,
or 1.46 percent, at 11,215.51. The Standard & Poor's 500 Index
<.SPX> was down 23.39 points, or 1.82 percent, at 1,261.52. The
Nasdaq Composite Index <> was down 53.51 points, or 2.32
percent, at 2,251.46.
GM was a fresh reminder that the market will face many
earnigns hurdles in the residue of the difficult economy for
the next few quarters.
"The third quarter is going to be a quarter that is singled
out as a period where profit estimates come in line with
realistic expectation," said Peter Kenny, managing director at
Knight Equity Markets in Jersey City, New Jersey.
"You will see profit estimates across the board, not just
for financials, lowered," he said.
European stocks ended at intraday lows. Coal prices dropped
more than 9 percent in London, which weighed heavily on mining
stocks. A solid recovery amid banks placed a cap on losses.
The FTSEurofirst 300 index <> of top European shares
closed 0.65 percent lower at 1,167.92 points, after clocking up
gains of 1.2 percent earlier in the session.
The benchmark has now fallen on eight of the last 11 days.
"People continue to be nervous," said Thierry Lacraz,
investment adviser at Pictet & Cie in Geneva. Lacraz pointed to
the market volatility, fears of further losses or capital
increases across industry sectors and soaring oil prices.
Miners and steelmakers fell sharply with the DJStoxx
European basic resources <.SXPP> index shedding 5.2 percent. An
8 percent decline at Antofagasta <ANTO.L>, and declines of 4.4
percent each at Rio Tinto <RIO.L> and Anglo American <AAL.L>
pushed the index down.
The dollar fell against the euro after a report showed the
U.S. private sector shed more jobs than expected in June, as
investors bought the euro ahead of an expected interest rate
hike by the European Central Bank on Thursday.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.45 percent at 72.04. Against the
yen, the dollar <JPY=> fell 0.17 percent at 105.89.
The euro <EUR=> rose 0.59 percent at $1.5881.
U.S. Treasury debt prices were higher.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
9/32 to yield 3.97 percent. The 30-year U.S. Treasury bond
<US30YT=RR> rose 20/32 to yield 4.51 percent.
Higher benchmark rates in Europe will boost the return of
euro-denominated assets and weigh on the U.S. currency.
U.S. government debt prices rose on the surprisingly steep
drop in the ADP National Employment Report, exacerbating fears
about consumer spending in a flagging U.S. economy.
ADP reported U.S. payrolls shed 79,000 jobs, almost four
times a forecast decline of 20,000.
The dollar fell against major currencies, with the U.S. Do
Bonds
"It was a splash of cold water in our face to see the
reports of joblessness in June shooting up like that,
suggesting we are just not out of the woods by any means in
terms of skirting recession," said David Dietze, chief
investment strategist at Point View Financial Services in
Summit, New Jersey.
Gold ended higher as record crude oil prices and the
dollar's weakness lifting bullion after investors took profits
early in the session.
Gold <XAU=> traded at $942.60/943.60 an ounce by New York's
last trade.
Japan's Nikkei average <> fell 1.3 percent, extending
its longest losing streak since 1965 to a 10th day, on fears
that high energy prices will curb export demand.
Tokyo Stock Exchange President Atsushi Saito told Reuters
the market's situation is "terrifying," adding "the market will
likely be lost for a while."
Shares in the Asia-Pacific region outside Japan were down
0.6 percent, according to an MSCI index <.MSCIAPJ> and were
within striking distance of mid-March lows.
(Reporting by Ellis Mnyandu, Walker Simon, John Parry and
Vivianne Rodrigues in New York and Naomi Tajitsu, Jane Merriman
and Patrizia Kokot in London)
(Reporting by Herbert Lash. Editing by Richard Satran)
