U.S stocks on Wednesday dropped after Standard & Poor cut its outlook on two companies that insure more than $1 trillion of debt.

S&P said it's more likely to cut the credit ratings of AMBAC Financial Group Inc and MBI Insurance Corp. in the next two years due to deteriorating mortgage debt.

The move by S&P resulted into a reverse of stocks' earlier gains.

The Standard & Poor's 500 index was down 0.31 percent, at 1,450.44 while the Dow Jones industrial average dropped 0.37 percent, at 13,183.62.

The Nasdaq Composite Index was down 0.09 percent at 2,593.58.

Morgan Stanley recorded a fourth quarter net loss from continuing operations of $3.61 a share while the investment bank reported $9.4 billion of write downs in mortgages and other assets.

Morgan Stanley shares increased 4 percent to $50 as China agreed to inject $5 billion as an investment into the Wall Street bank.

MBIA's shares declined 10.5 percent to $24.78 as AMBAC Financial's stock fell 6.6 percent to $25.20.

Palm Inc shares fell 8.7 percent to $5.42 while Union Pacific Corp's shares declined to $5.42 after it lowered its fourth quarter earnings outlook due to rapidly rising fuel costs.

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