* Mideast tension lifts crude prices, undermines dollar
* U.S. stocks fall as credit fears roil financial shares
* U.S. government debt rises on renewed safe-haven bid
(Adds close of U.S. markets, changes byline)
By Herbert Lash
NEW YORK, July 9 (Reuters) - Credit jitters swept Wall
Street again on Wednesday and pushed a key market index back
into bear territory as financial shares fell and the appeal of
safe-haven government debt took a shine.
Oil pulled out of a steep two-day slide to end little
changed after a U.S. government report showed a big drawdown in
nationwide crude inventories and OPEC-member Iran conducted
missile tests in a move that raised tensions with the West.
Iran's testing of long- and medium-range missiles,
including one that could reach Israel and U.S. bases in the
Mideast, led the dollar to retreat and boosted safe-haven
currencies such as the Swiss franc <CHF=>.
The Dow Jones industrial average <> closed down 237.26
points, or 2.08 percent, at 11,146.95. The Standard & Poor's
500 Index <.SPX> fell 29.03 points, or 2.28 percent, at
1,244.67. The Nasdaq Composite Index <> dropped 59.55
points, or 2.60 percent, at 2,234.89.
The broad market S&P 500 index fell into a bear market at
day's end, territory defined as a 20 percent decline from a
recent peak.
Banking shares tumbled and some investors worried that
Fannie Mae <FNM.N> and Freddie Mac <FRE.N> may need a
substantial capital injection, sending shares of the two major
U.S. mortgage finance sources sharply lower.
The KBW banking index <.BKX> fell 5.7 percent, while
Freddie Mac shares dropped almost 24 percent and Fannie Mae's
fell about 13 percent.
"The financials are not recovering. Some of the regional
banks are showing signs of weakness and starting to crack a
little bit," said Seth Plunkett, a portfolio manager for fixed
income with American Century Investments in Mountain View,
California.
"Overall we are seeing somewhat of a flight to quality and
strength in Treasuries," he said.
"There's still a lot of uncertainty out there, so it's
going to be hard for the market to make any real progress,"
said Alan Lancz, president of Alan B. Lancz & Associates Inc,
an investment advisory firm in Toledo, Ohio.
"Real estate prices are going down and the earnings power
that financial stocks had is going to be gone forever."
Cisco shares <CSCO.O> sank 5.7 percent after Chief
Executive John Chambers told Reuters customers of the network
equipment company see the economy picking up early in 2009
rather than later this year.
At least two brokerages cut their price targets on Cisco.
Stocks early in the session gained support from results
late Tuesday that were stronger than expected at U.S. aluminum
producer Alcoa <AA.N>, the first major company to post results
for the U.S. earnings season. Overseas equities rallied.
The FTSEurofirst 300 <> index of top European shares
closed up 1.71 percent and Japan's Nikkei average <>
closed up 0.15 percent.
Merrill Lynch <MER.N> fell more than 9 percent. Analysts
forecast the investment bank will post another $6 billion of
write-downs when it reports second-quarter results next week,
which could force the bank to raise additional capital.
"Equities have become a slave to one commodity -- oil --
and all these credit concerns do not help matters either," said
Brian Gendreau, a New York-based investment strategist at ING
Investment Management Americas, which recently went "neutral"
on U.S. stocks.
Oil closed little changed. U.S. crude stocks fell by 5.9
million barrels last week, more than triple analyst forecasts,
with the draw largely along the West Coast, according to the
U.S. Energy Information Administration. []
U.S. crude <CLc1> rose 1 cent to settle at $136.05 a
barrel, halting a precipitous fall from last week's record over
$145 a barrel. London Brent crude <LCOc1> gained 15 cents to
$136.58 a barrel.
Spot gold prices <XAU=> rose $7.45 to $926.95 an ounce.
Bonds rose. The benchmark 10-year U.S. Treasury note
<US10YT=RR> rose 18/32 to yield 3.82 percent. The 30-year U.S.
Treasury bond <US30YT=RR> gained 20/32 to yield 4.42 percent.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.48 percent at 72.599. Against the
yen, the dollar <JPY=> fell 0.59 percent at 106.80.
The euro <EUR=> was up 0.40 percent at $1.5733.
(Additional reporting by Gertrude Chavez-Dreyfuss, Ellen
Freilich and Al Yoon in New York and Jeremy Gaunt in London;
Editing by James Dalgleish)
