US STOCKS-Wall St slides on GDP, Fed warning on banks

(Updates to midday, changes byline)

By Cal Mankowski

NEW YORK, Feb 28 (Reuters) - U.S. stocks tumbled on Thursday as worries about the economy grew following a weaker-than-expected reading on gross domestic product and a warning from Federal Reserve Chairman Ben Bernanke that there probably will be bank failures because of the housing slump.

Stocks opened lower after new data showing sluggish growth in the economy, measured by GDP in the fourth quarter of 2007, and an increase in claims for jobless benefits.

Bernanke, during the second day of his semiannual testimony before a congressional committee, said there may be some failures among smaller banks that invested heavily in real estate because the housing market's severe problems may drain their capital. He added, however, that the U.S. banking system overall is in good shape with the biggest banks well capitalized. For details, see [ID:nN28573663]

The KBW Bank Index was down 3.3 percent, while the Standard & Poor's financials index was down 3 percent. JPMorgan Chase & Co. (JPM.N: Quote, Profile, Research) shares led the Dow's biggest decliners and weighed heavily on the S&P 500. JPMorgan Chase slid 3.7 percent to $42.75 after two brokerages cut their earnings estimates.

"I think this is a real issue," said Joseph Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania, adding that there are large inventories of homes for sale in states like Florida, California, Arizona and Nevada. He noted that banks in those markets that kept the loans on their books and did not diversify their lending could be in trouble.

The Dow Jones industrial average .DJI was down 127.65 points, or 1.01 percent, at 12,566.63. The Standard & Poor's 500 Index .SPX was down 12.93 points, or 0.94 percent, at 1,367.09. The Nasdaq Composite Index .IXIC was down 22.13 points, or 0.94 percent, at 2,331.65.

Battipaglia said the possibility of bank failures has not been discussed much, noting that the stock market generally reacts to news that is not only perceived to be negative but adds a new element.