US STOCKS-Wall St sinks on credit worries, oil

* Stocks fall on Fannie, Freddie worries; oil * Oil hits a record above $147/bbl, hurting sentiment * Dow falls below 11,000 for 1st time since July 2006 (Updates to afternoon)

By Kristina Cooke

NEW YORK, July 11 (Reuters) - U.S. stocks fell sharply on Friday on worry about the financial stability of the top two home financing providers Freddie Mac and Fannie Mae, while oil prices hit an all-time high, clouding the outlook for the economy.

All three major U.S. stock indexes dropped more than 1 percent, with the Dow Jones industrial average.DJI briefly dipping below the 11,000 level for the first time since July 2006.

The broad market fell as investors worried that the two pillars of the U.S. housing market could run short of capital, placing the fragile U.S. economy at even greater risk.

But Fannie Mae and Freddie Mac came off their of the session lows after U.S. Treasury Secretary Henry 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."

The mortgage lenders cut even more of their losses, after Sen. Christopher Dodd, Senate Banking Committee chairman, said Fannie and Freddie are fundamentally sound, strong and adequately capitalized.

A jump in U.S. crude oil prices CLc1, which hit a record above $147 per barrel earlier, further soured investor sentiment on concerns about the impact of higher fuel costs on corporate profits and consumer spending.

"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.