U.S. stocks fall as credit crisis jitters remain

By Herbet Lash

NEW YORK (Reuters) - Renewed fears about fallout from the credit crisis on Monday overshadowed initial enthusiasm over a rescue plan for the top two U.S. mortgage finance companies, dragging down stocks as investors turned to the safety of government bonds and gold.

Shares of Fannie Mae and Freddie Mac soared in European markets after the U.S. government and the Federal Reserve said on Sunday they would lend the two companies money and buy their stock if needed to shore up the two pillars of the U.S. housing market.

But the gains soon fizzled as analysts and investors noted any direct government investment in Fannie Mae and Freddie Mac would further dilute shares that lost more than 40 percent of their value last week alone.

The seizure of mortgage lender IndyMac Bancorp, late on Friday, the third largest bank failure in U.S. history, added to investor unease about bank stability and the future of the mortgage market.

The dollar clambered back from a near-record low against the euro, and U.S. and euro-zone government debt rose amid widespread concerns about global financial markets.

Freddie Mac passed its first test of investor confidence as buyers flocked to its $3 billion (1.5 billion pound) sale of debt, but although the routine auction went off without a hitch, investors remained wary and shares in both companies swung wildly.

"Markets are in effect agreeing that the debt is money good but the value of the equity is still in question," said Bret Barker, portfolio manager, Metropolitan West Asset Management, Los Angeles.

Before 1 p.m., the Dow Jones industrial average was down 53.90 points, or 0.49 percent, at 11,046.64. The Standard & Poor's 500 Index was down 9.89 points, or 0.80 percent, at 1,229.60. The Nasdaq Composite Index was down 25.12 points, or 1.12 percent, at 2,213.96.