U.S. stocks slip on revived credit fears

By Herbert Lash

NEW YORK (Reuters) - The American housing slump and global credit crunch came back to haunt investors on Tuesday, pushing U.S. stocks and the dollar lower and lifting government debt prices in a flight to safer yields.

Shares of U.S. banks sold off across the board after analysts at Goldman Sachs said the sector may need to raise $65 billion (33 billion pounds) of additional capital to cope with mounting losses from a credit crisis that they do not expect to peak until 2009.

The dollar slid after U.S. housing starts plunged to their lowest level since the last U.S. recession in the early 1990s, while U.S. Treasury debt rallied as press reports indicated the Federal Reserve is not set to raise interest rates soon.

Oil prices also slid, falling further from record highs on Monday, as investors took note of plans by top exporter Saudi Arabia to boost crude output to help curb soaring fuel costs.

In a harbinger of higher inflation ahead, U.S. corn, wheat and soybean prices rallied sharply as flooding in the U.S. Midwest hurt crop prospects and Argentine farmers kept up their protests against a government tax on soy exports.

The inflation worries are compounding the already difficult credit outlook, as rising prices put damper on the ability of central banks to ease tight credit. Central banks have indicated in recent days that they will go slow on raising rates with economies in a relatively fragile state. The U.S. Federal Reserve meets next week to decide rate policy.

"The market is unlikely to go higher without participation from financial stocks. You have funding and write-down issues with the financials," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

The KBW .BKX index of leading U.S. banks fell 3.7 percent, with all 24 shares posting declines, after Goldman analysts lowered price targets on 14 banking companies and cut 2008 earnings-per-share forecasts for 11 banks.