U.S. stocks fall Oil surges past $120

By Herbert Lash

NEW YORK (Reuters) - U.S. stocks fell on Monday as resurgent oil prices set a record over $120 a barrel and doubts about Bank of America's plan to buy the largest U.S. mortgage lender renewed concerns about the nation's economic health.

The jump in crude oil on supply concerns from OPEC members Nigeria and Iran fanned fears about the outlook for consumer spending and overshadowed a report that showed the U.S. service sector in April defied expectations and posted its first monthly gain this year.

The dollar, meanwhile, fell against the euro and the yen as investors debated the strength of the U.S. economy amid the high oil prices.

While the slip in U.S. stocks was the main driver of U.S. Treasuries, bond bulls cut bets that the United States will suffer a steep recession and expectations the Federal Reserve will cut interest rates further due to the latest evidence of economic resilience.

Financial shares fell after a brokerage said Bank of America is likely to renegotiate or even walk away from its deal to acquire ailing mortgage lender Countrywide Financial Corp.

Countrywide shares tumbled 10.4 percent to $5.36 and pulled the broader market lower on fears a scotched deal would show the credit crisis is deepening and has not abated.

"If they were to walk away from this deal, what will that mean? Will Countrywide have to file for bankruptcy? Will all the Countrywide paper get dumped into the market? Nobody knows," said Stephen Massocca, co-chief executive at San Francisco-based investment bank Pacific Growth Equities.

"It may be that there are reasonable answers to all this, but if that were to happen, that won't be good for the market," he said.