US STOCKS-AIG's loss pulls stocks down, oil over $126 hurts

(Updates to midday, changes byline)

By Cal Mankowski

NEW YORK, May 9 (Reuters) - U.S. stocks fell on Friday after American International Group (AIG.N: Quote, Profile, Research), the world's largest insurer, reported a record $7.8 billion quarterly loss, reviving concerns about the financial services sector.

Oil continued on a record-breaking streak, rising above $126 a barrel before slipping below $125. Investors have been concerned that the oil price will cause inflation to spread throughout the economy.

Pharmaceutical companies' shares were a major drag after Mylan Inc (MYL.N: Quote, Profile, Research) reported a wider loss and revenue below analysts' forecasts, and Bristol Myers Squibb Co (BMY.N: Quote, Profile, Research) fell on news that a generic version of blood thinner Plavix may soon be approved in Europe.

AIG had to write down assets linked to subprime mortgages and said it would raise $12.5 billion in new capital to strengthen its balance sheet. For details, see [ID:nN08402912].

Another big financial company, Citigroup Inc (C.N: Quote, Profile, Research), said it intends to shed roughly $400 billion of non-core assets in a bid to become more competitive. [ID:nN08433220].

"The news background is not good, but since we made lows around the end of January, I think the market is transitioning from a bear market to a bull market," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis. "It takes time. We did a lot of damage."

The Dow Jones industrial average .DJI fell 112.11 points, or 0.87 percent, to 12,754.67. The Standard & Poor's 500 Index .SPX declined 11.53 points, or 0.82 percent, to 1,386.15. The Nasdaq Composite Index .IXIC lost 12.24 points, or 0.50 percent, to 2,439.00.