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.
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