Market falls sharply on credit market worry

NEW YORK (Reuters) - Stocks dropped on Thursday as the credit crunch surfaced unexpectedly in the municipal bond market and after the Federal Reserve chairman said that he sees sluggish economic growth ahead.

Worries about a deteriorating credit market were exacerbated when Moody's Investors Service slashed its rating on bond insurer FGIC Corp. The move could lead to even more write-downs at banks that own securities covered by the company.

In testimony before a congressional committee, Fed Chairman Ben Bernanke acknowledged the outlook for the economy had worsened in recent months and said risks to growth had picked up.

The failure of several auctions for municipal bonds, considered a conservative investment, reminded investors the credit crisis is spreading, even to the safest sectors.

"There's just a tremendous amount of fear about how many more credit market shoes are going to drop. Corporates are being affected, munis are impacted," said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut. "There's a stench of fear that refuses to break."

Stocks ended a three-day string of gains as the Dow Jones industrial average <.DJI> fell 175.09 points, or 1.39 percent, at 12,377.15. The Standard & Poor's 500 Index <.SPX> was down 18.34 points, or 1.34 percent, at 1,348.87. The Nasdaq Composite Index <.IXIC> dropped 41.39 points, or 1.74 percent, at 2,332.54.

Technology shares were another drag as Goldman Sachs removed Intel Corp from a list of its top picks, saying economic weakness may hurt demand for the chip maker's products.

Graphics chip maker NVIDIA Corp added to concerns about the sector after it reported weaker margins for the first time in more than 3 years.

Intel shares fell 3.5 percent to $20.46, while Nvidia tumbled 16.3 percent to $22.61. The Philadelphia Stock Exchange semiconductor index <.SOXX> fell 2.8 percent.

Adding to unease in the financial sector, Swiss bank UBS revealed tens of billions of dollars in risky debt exposure.

U.S.-listed shares of UBS were among the biggest decliners on the New York Stock Exchange, down 8.3 percent at $33.94.

Bernanke said he saw no imminent threat of bank insolvencies but said more write-downs are likely.

FGIC, the fourth-largest bond insurer, is owned by a group including mortgage insurer PMI Group Inc and private equity firm Blackstone Group . Blackstone shares fell 4.7 percent to a record low of $16.83.

Other decliners in the financial sector included JPMorgan Chase & Co , down 3.4 percent to $42.61 and Bank of America Corp , down 2.5 percent to $42.24.

Apparel retailers tumbled after Liz Claiborne Inc forecast a big shortfall in fourth-quarter operating profit.

Liz Claiborne shares dropped 18.4 percent to $18.31. Jones Apparel Group Inc stock dropped 9.9 percent to $15.45 and AnnTaylor Stores shares lost 5.4 percent to $24.44.

(Editing by Kenneth Barry)

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