U.S. Stocks Drop as Lending Freezes Up Following AIG Takeover

 U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc., raising concern that more of the nation's biggest financial companies will fail.

Goldman Sachs Group Inc. and Morgan Stanley, the two remaining independent Wall Street securities firms after Lehman Brothers Holdings Inc. collapsed and Merrill Lynch & Co. was taken over, plunged the most ever. General Electric Co., the world's third-biggest company, fell 8.7 percent and U.S. Steel Corp. slid 11 percent. Yields on three-month Treasury bills sank to a 54-year low as investors sought the relative safety of government debt, and a measure of corporate borrowing costs surged to the highest since the crash of 1987.

The S&P 500 lost 27.56 points, or 2.3 percent, to 1,186.03 at 3:03 p.m. in New York, its lowest level in more than three years as nine of the 10 main industry groups declined. The Dow Jones Industrial Average decreased 198.58, or 1.8 percent, to 10,860.44. The Nasdaq Composite Index sank 70.04, or 3.2 percent, to 2,137.86, falling below its previous low for the year on March 10. Almost 10 stocks fell for each that rose on the New York Stock Exchange.

The S&P 500 pared a drop of as much as 4.2 percent as energy companies climbed on a jump in oil prices and CNBC reported that Morgan Stanley CEO John Mack told employees the company is ``strong'' and that short-sellers are responsible for the tumble in its shares.

About $2.8 trillion of market value has been erased from global stocks this week, triggered by the largest-ever bankruptcy filing by Lehman Brothers, once the fourth-largest U.S. securities firm. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.