US STOCKS-Wall St sinks on Fannie and Freddie woes, oil's pop

* Stocks add to losses as Paulson hints no GSE bailout * Fannie, Freddie shares off lows after Paulson statement * Oil hits a record above $147/bbl, hurting sentiment * Dow falls below 11,000 for 1st time since July 2006 (Updates to midday)

By Walter Brandimarte

NEW YORK, July 11 (Reuters) - U.S. stocks fell sharply on Friday after Treasury Secretary Henry Paulson gave no signs of planning a bailout for home financing providers Freddie Mac and Fannie Mae, and oil prices hit an all-time high, clouding the outlook for the economy.

All three major U.S. stock indexes dropped about 2 percent, with the Dow Jones industrial average.DJI breaking below the psychologically important 11,000 level for the first time since July 2006.

Paulson, reacting to a New York Times report that said the government is mulling a takeover of the two mortgage lenders, said the Treasury Department's main goal at the moment is to back the companies "in their current form."

Fannie Mae's and Freddie Mac's stocks recovered from their session lows after Paulson's statement, although they were still down steeply, as a full takeover could potentially wipe out shareholder value. Fannie Mae FNM.N was down 28.6 percent at $9.42, off a session low at $6.87, and Freddie Mac FRE.N was down 25 percent at $6.00, off a session low at $3.89. They topped the list of the New York Stock Exchange's biggest percentage losers in early afternoon trading.

Losses piled up in the broader market as investors worried that a possible collapse of the two firms, which are facing increasing mortgage loan delinquencies and foreclosures, would make the housing downturn worse, crippling the economy.

A jump in U.S. crude oil prices CLc1, which hit a record above $147 per barrel earlier, further soured investor sentiment. U.S. crude for August delivery was trading at $144.15 a barrel, up $2.50, or a gain of about 1.8 percent, in early afternoon trading on the New York Mercantile Exchange.

"The bottom line is that we're in the middle of a financial Tsunami. This is a storm the likes of which this country hasn't seen," said Peter Kenny, managing director at Knight Equity Markets in Jersey City.

"The market right now needs to see results. It no longer gives anyone the benefit of the doubt," he added.

The Dow Jones industrial average .DJI was down 217.22 points, or 1.93 percent, at 11,011.80. The Standard & Poor's 500 Index .SPX was down 23.58 points, or 1.88 percent, at 1,229.81. The Nasdaq Composite Index .IXIC was down 43.20 points, or 1.91 percent, at 2,214.65.

Lehman Brothers shares LEH.N slid 20 percent to $13.91, a day after dropping over 12 percent on discredited rumors of customers pulling back their exposure to the investment bank.

Only two Dow components were in the black: General Electric (GE.N), up 0.5 percent at $27.77 after it posted second-quarter profit in line with Wall Street expectations, and Caterpillar (CAT.N), up just 0.03 percent, or 2 cents, at $68.44, after Bernstein raised its price target on the stock to $99 from $89, according to theflyonthewall.com.

Shares of Anheuser-Busch Cos Inc (BUD.N), an S&P 500 component, soared 7.7 percent to $65.94 after a source said the maker of Budweiser beer and Belgian-Brazilian rival InBev NV INTB.BR have begun negotiations for a friendly merger. (Additional reporting by Ellis Mnyandu; Editing by Jan Paschal)