Wall Street tumbles, led by financials

By Kristina Cooke

NEW YORK (Reuters) - Stocks tumbled more than 2 percent on Thursday after a report showing yet another drop in U.S. home sales prompted investors to take profits in financial shares, which had rallied over the past week.

The Dow fell the most in a month, as the rising price of oil compounded worries about the economy. The jump in crude spurred unease that the recent sharp declines may have run their course. Shares of companies particularly vulnerable to higher fuel costs, such as airlines and retailers, sank.

Financial companies, which have been incurring huge losses from the housing slump, slid after the data from the National Association of Realtors showed June sales of existing homes hit a 10-year low. An index of bank stocks fell 6.7 percent -- after rising about 40 percent over the past week.

Trading has been very volatile in recent weeks and the market has been on tenterhooks, given a flood of serious setbacks stretching from a high-profile bank failure to the cobbling together of a last-minute rescue plan of the two pillars of the U.S. housing market-- Fannie Mae and Freddie Mac. The plan was passed by the House on Wednesday night, and is expected to be approved by the Senate on Saturday.

"The bailout plan restored enough confidence in the sector to take some pressure off the stocks, but the pretty nice bounce we saw seems to have run its course," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.

"When people take another look at the underlying economics, they see that the overhang in housing has gotten a bit worse."

The Dow Jones industrial average fell 283.10 points, or 2.43 percent, to close at 11,349.28. The Standard & Poor's 500 Index slid 29.65 points, or 2.31 percent, to 1,252.54, while the Nasdaq Composite Index shed 45.77 points, or 1.97 percent, to 2,280.11.

Shares of mortgage finance companies Fannie Mae and Freddie Mac fell more than 18 percent, just a day after the House approved the housing rescue package that would include a U.S. government lifeline for the two companies.