Weak data, AIG losses sting Wall Street indexes

NEW YORK (Reuters) - Stocks tumbled on Friday as a fresh round of data pointed to an economy on the brink of recession and a huge loss at American International Group showed the housing meltdown is still crushing balance sheets in the finance sector.

Benchmark indexes fell after a survey said U.S. consumer sentiment was at its lowest in 16 years and another report said business conditions in the Midwest were the weakest in more than six years.

Dismal results from the insurer AIG late Thursday pounded sentiment further, with financial service company shares leading the broader market lower. AIG fell 6 percent and was the top drag on the Dow and the S&P 500. Shares of Bank of America Corp lost 2.2 percent.

The technology sector sank as well after Dell Inc , the world's second-largest personal computer maker, posted a lower-than-expected quarterly profit and cautioned that customers may rein in spending, sending its shares lower.

"The news was universally bad today, from AIG to Dell to more credit problems, to weakness in the economy and lower consumer confidence. We face strong short-term headwinds," said Jim Awad, chairman of W.P. Stewart & Co. Ltd. in New York.

The Dow Jones industrial average fell 204.83 points, or 1.63 percent, to 12,377.35 and the Standard & Poor's 500 Index declined 23.16 points, or 1.69 percent, to 1,344.52. The Nasdaq Composite Index tumbled 37.93 points, or 1.63 percent, to 2,293.64.

The bond insurance industry took another hit after CNBC television reported that an effort to rescue Ambac Financial Group Inc has hit a snag, adding to the negative tone.

Ambac declined 4.8 percent to $11.24, while rival MBIA Inc shed 4.8 percent to $13.38.

AIG shares dropped to $46.90 on the New York Stock Exchange after the world's largest insurer posted a $5.29 billion fourth-quarter loss late on Thursday, hurt by write-downs of securities linked to bad mortgage bets.

Shares of Bank of America declined 2.2 percent to 40.52 on the NYSE, while those of JPMorgan Chase & Co , the No. 3 U.S. bank, fell 1.9 percent to $41.62.

The latest signs of weakness came from a report that showed U.S. Midwest business activity contracted sharply in February.

The National Association of Purchasing Managers-Chicago said areas of the country least affected by the boom-bust housing cycle are also feeling ripples from the crisis.

The Reuters/University of Michigan Surveys of Consumers showed that sentiment slumped to a 16-year low in February, hitting levels that usually sound alarm bells for recession.

Shares of home builders also took a beating, sending the Dow Jones home construction index down 3.5 percent.

Toll Brothers , a luxury home builder, fell 2.5 percent at $21.94.