Stocks declined on Thursday after the chief executive of Countrywide Financial Corp said the housing market was certainly not getting better and could push the economy into a recession.

The comments from Countrywide CEO Angelo Mozilo, speaking on CNBC television, offset optimism about a $2 billion injection into Countrywide, the biggest U.S. mortgage lender. He also said the commercial paper market isn't improving.

Shares of Countrywide trimmed some of their gains after the news, but were still up 4.6 percent at $22.82 on the New York Stock Exchange. The stock was up 6.5 percent when Countrywide's CEO began talking on CNBC.

The S&P financials index slipped 0.6 percent. Citigroup Inc was down 0.3 percent at $48.29. JPMorgan Chase & Co fell 1.2 percent to $45.46. The KBW mortgage finance index was down 0.6 percent.

Late Wednesday, Bank of America announced the investment in Countrywide, which analysts said would help shore up the mortgage lender's finances as Countrywide struggles with a liquidity crunch. Last week Countrywide tapped into an entire $11.5 billion credit line.

The Dow Jones industrial average was down 49.59 points, or 0.38 percent, at 13,186.54. The Standard & Poor's 500 Index was down 8.37 points, or 0.57 percent, at 1,455.70. The Nasdaq Composite Index was down 19.63points, or 0.77 percent, at 2,533.17.

The Fed has cut the discount rate and added liquidity to the markets but those things aren't enough to turn the fundamental market around, said Phil Orlando, chief equity market strategist at Federated Investors, in New York.

Last Friday, the Federal Reserve surprised financial markets by cutting the discount rate it charges on direct loans to commercial banks by 50 basis points to 5.75 percent.

The fed funds rate is going to have to come down, Orlando said. We're going to need a reduction of a 100 basis point in the fed funds rate during the course of the second half of this year.

The fed funds rate target is the central bank's main tool for conducting monetary policy. The Fed has held the fed funds rate at 5.25 percent since late June 2006.

Earlier Thursday, the Fed said that commercial paper outstanding fell $90.2 billion in the week to August 22 to $2.04 trillion, after a drop of $91.1 billion the previous week.

(Additional reporting by Ellis Mnyandu and Kristina Cooke)

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