Stocks fall on woes at U.S. mortgage firms

By Gerrard Raven

LONDON (Reuters) - Huge drops in the shares of the two largest U.S. mortgage corporations before the opening bell on Wall Street pushed down already-weak European equities on Friday while oil prices hit a new record high.

The dollar was caught in the maelstrom and Wall Street looked set for a poor start.

Shares in Freddie Mac (FRE.N) were down 35 percent and those in Fannie Mae (FNM.N) dropped 27 percent following a New York Times report the U.S. government is mulling a takeover of the two institutions.

Such a move would guarantee the mortgages the government-sponsored entities own, but could leave shareholders with nothing.

European shares initially rose on the report, with investors relieved that Washington looked ready to step in to save the two massive lenders, which are vital to the U.S. property market and economy.

But by midsession, the FTSEurofirst 300 index .FTEU3 of top European shares was down 1.55 percent. Stock market futures indicated Wall Street would suffer an initial loss of up to one percent.

"It feels like we're going back into doom and gloom all round," said Roger Cursley, a strategist at Investec in London.

"We've got inflationary pressures, and the credit crunch issue that set us off on this is not over."