US stocks slump on economy fears

The US housing slowdown has led to wider economic problems

The Dow Jones Industrial Average slumped nearly 250 points amid fears that the US could enter a recession, as consumers reduce their spending.

The benchmark index shed 246.79 points, or 1.91%, to end at 12,606.30 while the Nasdaq declined 1.95%.

A warning by American Express a day earlier, that spending was slowing and defaults would rise, fuelled jitters.

Investors are worried that major banks are yet to reveal the full impact of their exposure to the housing slowdown.

The financials are going to continue to be a problem Michael Church Church Capital Management.

A report in the New York Times on Friday said leading investment bank Merrill Lynch could see as much as $15bn in losses, stemming from its exposure to the sub-prime crisis.

"The financials are going to continue to be a problem," said Michael Church, portfolio manager at Church Capital Management.

Nerves surrounding the financial sector are increasing, ahead of imminent earnings statements from major banks.

Analysts say there is still much uncertainty about the extent to which banks will have to write off mortgage related loans.

Amex fell more than 10% on Friday, while Countrywide Financial plunged 18%.

Earlier in the day US banking giant Bank of America, said it would buy Countrywide Financial, the country's biggest mortgage lender, in a $4bn (£2.04bn) deal.

Countrywide was a key player in the sub-prime market, which targets those with limited credit records or unpredictable incomes.

During the housing boom, many people took out mortgages while borrowing costs were lower.

However, as US interest rates have risen over the past two years, many borrowers have defaulted on payments they can no longer afford.

Wider impact

But fears about an economic slowdown are now being seen far beyond finance firms.

On Thursday, Federal Reserve head Ben Bernanke said that the outlook for the US economy in 2008 had worsened.

Tiffany issued a profit warning on Friday, echoing fears that consumer spending would cool, and highlighting worries that even high-end spenders were tightening their belts.

The upmarket jewellery firm saw its shares end 11.2% down, while at the other end of the spectrum fast food firm McDonald's shed 6.6%.

As well as the Dow Jones Industrial Average, the Standard & Poor's 500 slumped 1.36%.

For the week, the Dow fell 1.5%, the Standard & Poor's 500 declined 0.8% and the Nasdaq dropped 2.6%.

During the same period the FTSE 100 dropped 2.1%, while both the benchmark indexes in France and Germany were more than 1% lower for the week.