Economic warnings put chill on stocks

Stocks sank Thursday as investors fretted over a rise in unemployment claims and the prospect of more bank failures. The Dow Jones industrial average fell 112 points, breaking a four-day winning streak.

Federal Reserve Chairman Ben S. Bernanke said in testimony to Congress that there would probably be more bank failures because of the weak economy. Three small banks have failed since the summer, when the lending industry started losing billions of dollars as mortgage defaults soared.

“Implying that some banks may fail stirs concerns for any investor who’s familiar with financial and economic history,” said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. “Investors have been very edgy about credit market conditions and banks’ financial conditions. Very edgy. And this doesn’t remove that edginess.”

Before Bernanke’s remarks, stocks fell in response to a Labor Department report that first-time unemployment claims rose last week by 19,000 to 373,000.

Scott Wren, equity strategist at A.G. Edwards & Sons, said it was clear that employers were cautious about hiring.

“To consistently see claims up near 400,000, that’s pretty telling oftentimes of a recession,” said Wren, who said he still estimated the chance of a recession at less than 50%.

The Dow slumped 112.10 points, or 0.9%, to 12,582.18.

The Standard & Poor’s 500 index declined 12.34 points, or 0.9%, to 1,367.68, and the Nasdaq composite index lost 22.21 points, or 0.9%, to 2,331.57.

The Russell 2,000 index of smaller companies fell 10.72 points, or 1.5%, to 705.72.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange.

Bernanke offered up some positive comments in his testimony, predicting that most banks would bounce back from their mortgage troubles and that inflation would ease, and declaring that the United States was nowhere near the stagflation scenario of the 1970s. Stagflation is characterized by economic weakness coupled with elevated inflation.

But Wall Street was skeptical of Bernanke’s fairly upbeat take on the economy and latched onto his admission that more banks could fail.

“Bernanke is about as skillful a Fed chairman as I have seen,” said Johnson, whose more than four-decade career spans six Fed chairmen. “But these times require a very, very skillful chairman. I don’t believe I’ve seen times as challenging as these.”

Oil futures jumped $2.95 to settle at a record $102.59 a barrel in New York.

Gold futures for April delivery spiked to an all-time trading high of $975 an ounce before closing at $967.50, up $6.50. The March contract rose $6.30 to $964.50.

Yields on Treasury bonds fell along with stocks. The yield on the benchmark 10-year Treasury note tumbled to 3.65% from 3.85%. The dollar fell to another record low against the euro, which was quoted at $1.522, up a penny.

An index of financial shares slid 3%, the most among 10 large industry groups in the S&P; 500. The KBW Regional Banking Index declined 3.2%. Moody’s Investors Service downgraded eight regional and community banks.

Mortgage-finance giant Freddie Mac fell for the sixth straight day, dropping 60 cents to $24.49, an 11-year low, after posting a $2.5-billion fourth-quarter loss. Rival Fannie Mae added 63 cents to $27.90.

Thornburg Mortgage tumbled $1.78, or 15%, to $9.76 after the lender said it had received margin calls -- demands for immediate repayment of debt -- on a portfolio of mortgage-backed securities.

Home builders in the S&P; 500 lost 8.1% as a group. Centex tumbled $2.46 to $23.71. Lennar fell $1.76 to $19.44. D.R. Horton lost $1.58 to $15.52. KB Home dropped $1.47 to $25.75.

In other market highlights:

* Shares of Sprint Nextel sank 86 cents, or 9.6%, to $8.09. The company posted a $29.5-billion fourth-quarter loss after writing down most of the remaining value of its Nextel unit acquired two years ago. Sprint also slashed its dividend and predicted further sharp losses of customers.

* MF Global plunged $8.09, or 27%, to $21.19. The New York-based futures and options broker said it lost $141.5 million after a broker traded more wheat contracts than allowed.

* AIG fell $2.10, or 4%, to $50.15 on speculation the insurer would post its first loss in five years, which it did after the close of trading. AIG fell a further $1.33 to $48.82 after hours.

* Overseas, key stock indexes fell 0.8% in Japan, 1.8% in Britain, 1.9% in Germany and 2.1% in France.