Jan. 8 (Bloomberg) -- U.S. stocks fell as worse-than- forecast home sales and a warning by AT&T Inc. on weaker customer spending sent the Standard & Poor's 500 Index to the lowest level since March.

AT&T declined the most in almost five years after Chief Executive Officer Randall Stephenson said the biggest U.S. phone company faces ``softness'' in its consumer business. Countrywide Financial Corp. tumbled the most since October 1987 on concern the largest U.S. mortgage lender is short of cash.

The S&P 500 lost 25.99, or 1.8 percent, to 1,390.19, the lowest since March 16. The Dow Jones Industrial Average slipped 238.42, or 1.9 percent, to 12,589.07. The Nasdaq Composite Index retreated 58.95, or 2.4 percent, to 2,440.51. Nine stocks dropped for every two that rose on the New York Stock Exchange.

``The consumer is finally getting pinched, and that's probably going to cut a lot deeper than people thought,'' said Dan Genter, who helps manage $2.8 billion as president of RNC Genter Capital Management in Los Angeles. ``This market is very, very vulnerable. That is shining through now.''

The National Association of Realtors report that pending home sales fell 2.6 percent in November reinforced concern that the worst housing slump in 16 years will deepen. The depressed housing market, along with rising energy costs and higher unemployment, may stifle consumer spending, which accounts for more than two-thirds of the economy.

The S&P 500 has fallen 5.3 percent this year, its worst start since 1930, according to Stock Trader's Almanac. The index closed more than 10 percent below its Oct. 9 record for the second time.

AT&T Declines

AT&T dropped $1.87, or 4.6 percent, to $39.16. Stephenson said the company is disconnecting more home-phone and high-speed Internet customers for failing to pay their bills. The pressure hasn't affected the mobile-phone unit or corporate sales, he said at a conference in Phoenix today.

Phone companies in the S&P 500 dropped 4.8 percent as a group for the steepest slide since February 2003. Verizon Communications Inc., the second-biggest U.S. phone company, lost 93 cents to $41.99.

Countrywide declined $2.17, or 28 percent, to $5.47, the lowest since July 1996. ``There's some sort of rumor that they would go under, but it's purely a rumor,'' said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees about $50 billion in Santa Fe, New Mexico.

``There is no substance to the rumor that Countrywide is planning to file for bankruptcy,'' spokesman Rick Simon said in a statement. Countrywide has said it has adequate liquidity to run its business and predicted in October that it will be profitable this year.

Banks, Builders Fall

Bank of America Corp., Lennar Corp. and MBIA Inc. led banks, builders and mortgage-bond insurers lower after the number of Americans signing contracts to buy previously owned homes fell more than forecast in November.

The National Association of Realtors' index of pending home sales decreased 2.6 percent to 87.6, following a 3.7 percent gain in October that was larger than previously estimated, the group said.

Economists predicted the index would fall 0.7 percent following a previously reported 0.6 percent October increase, according to the median of 33 projections in a Bloomberg News survey.

Bank of America, which invested $2 billion in Countrywide in August, dropped $1.49 to $38.41, the lowest since December 2003. MBIA Inc., the largest bond insurer, fell $3.64 to $13.98, a 16- year low. The 92-member S&P 500 Financials index dropped 3.7 percent, extending its decline over the past year to 28 percent.

`More Pain'

``The genesis of all this is the housing market,'' David Rolfe, who helps oversee about $575 million as chief investment officer at Wedgewood Partners Inc. in St. Louis, said in an interview with Bloomberg Radio. ``Given the writedowns, the banking industry in general now is simply undercapitalized. We have some more pain to work through.''

Lennar, the biggest U.S. builder by sales, dropped $1.15 to $14.62. KB Home fell $1.70 to $16.78. The Los Angeles-based builder reported a wider-than-estimated fourth quarter loss after $917.6 million of writedowns and tax expenses. A gauge of homebuilders in S&P indexes fell for a fifth day, losing 5.7 percent.

Economists said more stringent lending practices following the collapse in subprime mortgages and prospects that home prices will keep falling are deterring buyers.

Economy Concern

U.S. stocks posted the steepest weekly loss since July last week after unemployment jumped to a two-year high of 5 percent and the Institute for Supply Management's manufacturing index had its steepest drop in five years.

Nine of 10 industry groups in the S&P 500 fell today. Technology shares dropped 2.8 percent as a group, bringing their six-day loss to 11 percent, the biggest slide since September 2002.

Microsoft Corp., the world's largest software maker, retreated $1.16 to $33.45 today. Hewlett-Packard Co., the biggest maker of personal computers, declined $2.16 to $43.19.

General Electric Co. and United Technologies Corp. led a 2.4 percent decline in a gauge of S&P 500 industrial companies.

GE, the second-biggest U.S. company by market value, slipped 78 cents to $35.40. United Technologies, the maker of Carrier air conditioners and Black Hawk helicopters, lost $2.88 to $71.79.

Drugmakers Rise

A gauge of health-care companies posted the only gain among the S&P 500's main industries, rising 0.8 percent. Amgen Inc. climbed 94 cents to $46.33 after Chief Executive Officer Kevin Sharer said the world's largest biotechnology company beat its 2007 profit forecast because of spending cuts.

The S&P 500 Health Care Index has gained 3 percent since Jan. 4 as investors snapped up shares of companies least affected by an economic slowdown.

``We don't think we're at a recession yet but even if we are, stocks may be OK,'' said William Stone, who helps manage $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. ``Certain sectors like health care can continue to grow even if the economy slows down a bit.''

Michael Krensavage, a New York-based pharmaceutical analyst at Raymond James & Associates, said the gains health-care stocks may reflect investors' growing expectations that Hillary Clinton will fail to win the Democratic party's presidential nomination.

Clinton has a 23 percent likelihood of becoming her party's nominee, according to futures contracts traded at Intrade, a unit of Dublin-based Trade Exchange Network Co.

`Bad Taste'

``Right now there is a tremendous worry about the 2008 elections,'' Krensavage said. ``Investors still have a bad taste in their mouth when it comes to Hillary from '93.''

Clinton's 1993 proposal, known as ``Hillarycare,'' would have established government control over what sort of health plans would have been available to people and would have required all employers to offer benefits or pay into a fund. Her new plan limits this requirement to large businesses and tries to entice smaller ones with credits to help them cover costs.

The Russell 2000 Index, a benchmark for companies with a median market value of $528.1 million, dropped 2.6 percent to 704.86. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, declined 1.9 percent to 13,963.20. Based on its drop, the value of stocks decreased by $333.3 billion.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: January 8, 2008 18:35 EST