Market sinks on credit concerns

Financials led a sharp drop on Wall Street on Thursday, wiping out the previous session's Fed-fueled gains, after brokerages downgraded the two biggest U.S. banks, sparking fears of more credit crisis fallout.

Adding to the gloom, Exxon Mobil reported profits that fell short of analysts' expectations due to slim margins from gasoline production and lower natural gas prices.

Stocks surrendered the gains they notched Wednesday after the Federal Reserve cut the benchmark fed funds rate a quarter percentage point to 4.5 percent. But the U.S. central bank suggested further rate reductions were far from a sure bet.

The news coming out of financials, the downgrades in particular on Citigroup, is really pulling the market down, said Owen Fitzpatrick, head of the U.S. Equity Group at Deutsche Bank Private Wealth Management in New York.

There are concerns of the prolonged pain we're going to see with the unwinding of some of these subprime issues in the financial sector. Even though we've seen large write-offs, there's concern there is still more out there.

The Dow Jones industrial average was down 266.30 points, or 1.91 percent, at 13,663.71. The Standard & Poor's 500 Index was down 29.00 points, or 1.87 percent, at 1,520.38. The Nasdaq Composite Index was down 44.72 points, or 1.56 percent, at 2,814.40.

The S&P financial index fell 3.9 percent, its biggest drop since August 9, when the credit crisis made headlines in Europe and rattled global markets.

CIBC World Markets downgraded Citigroup to sector underperformer, citing capital concerns. CIBC analyst Meredith Whitney, who cut her 2008 and 2009 earnings estimates for the bank, said she believes Citi will be forced to sell assets, raise capital or cut its dividend to shore up its capital ratios.

CIBC also downgraded Bank of America, the second-largest U.S. bank, saying it sees a diminished revenue outlook for the bank. In addition, Credit Suisse cut its rating on Citigroup.

Citigroup shares dropped 6.8 percent to $38.55, to a 4-1/2-year low, while Bank of America shares shed 4.8 percent to $45.97. American International Group (AIG.N: Quote, Profile, Research) fell 5.1 percent to $59.90.

Exxon shares slid 2.8 percent to $89.38 on the NYSE.

Shares of plastic shoe maker Crocs plunged 34.6 percent to $48.91 and ranked among the Nasdaq's biggest percentage losers after the company's profit outlook trailed Wall Street forecasts.

In economic news, an Institute for Supply Management report showed manufacturing growth deteriorated last month to its slowest pace since March on tightened credit conditions and the housing downturn.