Wall Street wilts on retailers and gloomy corporate news

NEW YORK (Reuters) - Stocks slid on Monday as the economic slowdown continued to eat into corporate profits and outlooks, while retailers tumbled on worries of lackluster Christmas sales.

Walgreen Co , one of the country's largest drug store chains, posted smaller-than-expected earnings and the largest U.S. staffing company, Manpower Inc , withdrew its fourth-quarter profit forecast.

The S&P U.S. Retailers Index <.RLX> shed 4 percent as investors worried that cash-strapped shoppers had stayed home despite deep discounts over the last weekend before the Christmas holiday.

"Retailers are having a tough time and I think it's no big surprise," said Bruce Zaro, chief technical strategist, Delta Global Advisors in Boston.

"As we get closer (to Christmas) you see the desperate measures they're taking to get anybody in the stores."

The Dow Jones industrial average <.DJI> fell 118.84 points, or 1.39 percent, to 8,460.27. The Standard & Poor's 500 Index <.SPX> was down 22.20 points, or 2.50 percent, at 865.68. The Nasdaq Composite Index <.IXIC> lost 49.13 points, or 3.14 percent, to 1,515.19.

The broad S&P 500 index was trading at the lowest level in a week.

With just seven trading days remaining in the year, there is little hope for the markets to avoid having their worst yearly performance since the 1930s. The S&P 500 is down 39.5 percent for the year.

Volume was expected to be lower throughout the week shortened by the Christmas holiday.

Investors also contended with further negative news on the housing market.

U.S. banking regulators said the rate of home owners defaulting after their loans have been modified shows no signs of leveling off. Some policy-makers have argued that restructuring home loans would reinvigorate the housing market and U.S. economy.

The Dow Jones U.S. Home Construction Index <.DJUSHB> fell nearly 5 percent, while Toll Brothers fell 6.1 percent to $20.38.

Walgreen said it was opening fewer stores than it previously planned as consumers curbed their spending. Its shares fell 5.1 percent to $24.75 on the New York Stock Exchange.

Rival CVS Caremark Corp also said it was seeing customers cut back. CVS said December sales would be weaker than the past two months, but it stood by its forecast. Shares of CVS were down 1.7 percent at $26.50

Manpower, the world's No. 2 staffing company, withdrew its profit outlook, citing light demand for temporary workers due to the spreading global recession, sending its shares down 15.2 percent to $30.88.

Caterpillar Inc was among the Dow's biggest drags, falling 2.7 percent to $41.53 after the heavy equipment maker said it would cut white-collar pay by up to 50 percent and offer buyouts to some employees as it seeks to trim costs.

Toyota Motor Co <7203.T>, the world's biggest automaker, forecast its first group operating loss and said it was impossible to predict how severely the current "unprecedented emergency" would cut the global demand for cars next year.

U.S.-traded shares of Toyota were down 4.9 percent to $61.26.

A Credit Suisse analyst said the equity of General Motors Corp may be wiped out as it complies with the restructuring targets laid out in the federal auto bailout last week. Shares of GM, a Dow component, fell 16.9 percent to $3.73.

Retailers buckled under dwindling consumer demand in what is usually the busiest shopping season. J.C. Penney Inc shed 6.4 percent to $18.64, and Liz Claiborne Inc lost 9 percent to $2.92.

On the Nasdaq, Apple and Google were among the top drags. Apple dropped nearly 5 percent to $85.55 and Google fell 4.6 percent to $296.02.

(Editing by Tom Hals)