US STOCKS-Wall St drops as AIG fuels credit worries

(Updates to midmorning)

By Kristina Cooke

NEW YORK, Feb 11 (Reuters) - U.S. stocks fell on Monday on renewed worries about credit losses after insurer American International Group Inc (AIG.N: Quote, Profile, Research) received a rebuke from its auditors for how it valued some credit derivatives.

The disclosure cast doubt on AIG's past contention that the world's largest insurer didn't face major problems stemming from the credit crisis that has slammed other financial institutions.

Shares of AIG fell 11.2 percent to $45, a five-year low and its worst one-day percentage drop since the 1987 stock market crash. That dragged on shares of other financial companies, with the S&P financials index down 2.6 percent.

Economic jitters persisted after finance leaders from the Group of Seven major economies said during the weekend problems in the U.S. housing market may lead to worsening conditions as debt-laden banks clamp down on credit.

"The concerns about AIG are affecting the financials and are clearly having a negative effect on sentiment," Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

"You also had some comments from leaders of the G7 which may have alarmed some."

The Dow Jones industrial average .DJI was down 86.81 points, or 0.71 percent, at 12,095.32. The Standard & Poor's 500 Index .SPX was down 8.62 points, or 0.65 percent, at 1,322.67. The Nasdaq Composite Index .IXIC was down 8.03 points, or 0.35 percent, at 2,296.82.