Dow loses over 280 points on mortgage, credit fears (AFP)

NEW YORK (AFP) - The leading Dow Jones Industrial Average plunged over two percent Friday as US stock markets suffered a battering from mortgage- and credit-related woes.

Other US stock indices also endured a bruising as fears about the strength of the mortgage market continued to roil Wall Street.

A tightening of credit conditions has also spooked investors who were already worried about housing and mortgage problems denting the wider economy.

The Dow plummeted a hefty 281.42 points (2.09 percent) to a close of 13,181.91.

The Nasdaq composite fell 64.73 points (2.51 percent) to finish at 2,511.25 while the broad-market Standard Poor's 500 index dropped 39.14 points (2.66 percent) to 1,433.06.

"Everyone with a pulse realizes there are big problems on the table," said AG Edwards chief market strategist Al Goldman.

"The determining factor will be the mood of investors -- glass half-full or half-empty," Goldman said in weighing up whether further market declines, or rebounds, could be in the cards next week.

European stocks also lost ground Friday as international investors worried about their US holdings. In London the FTSE 100 index lost 1.21 percent to close at 6,244.30 points.

US stocks tanked after the government revealed that job growth had slowed by more than expected, and as a large mortgage lender, American Home Mortgage, announced it was not accepting new business.

The Labor Department reported below-par job growth of 92,000 new positions in July. Most economists had anticipated 135,000 new jobs.

The unemployment rate crept up 0.1 point to 4.6 percent.

"With the labor market so tight and with uncertainty continuing, it should not be surprising that firms are adding workers at a very sluggish pace," said Joel Naroff, of Naroff Economic Advisors.

Shares also came under pressure after American Home Mortgage said it had stopped taking new home-loan applications and had notified over 6,000 employees they would be laid off, effective Friday.

The mortgage lender blamed the shutdown on the ailing US housing sector and a related credit crunch which has made it harder to access fresh capital.

Its share price dropped to 69 cents, down from 1.45 dollars a day earlier and off from 10.47 dollars a week ago.

Other mortgage lenders also saw their shares come under pressure, as did the investment bank and brokerage Bear Stearns.

The Standard Poor's ratings agency said it was downgrading its outlook for Bear Stearns to "negative" from "stable," largely because of its exposure to mortgage-related securities.

Bear Stearns shares closed down over six percent at 108.35 dollars after Standard Poor's raised concerns about its exposure to mortgage-related securities.

"Bear Stearns has material exposure to holdings of mortgages," SP said, in explaining its move.

Other bank and financial stocks also took a beating as analysts fretted over tightening credit conditions.

Merrill Lynch saw its shares slide over three percent to 70.05 dollars while Goldman Sachs's shares lost over four percent to 179.68 dollars.

Consumer products group Proctor Gamble meanwhile reported improved profit for its latest quarter, saying earnings had swelled 19 percent to 2.3 billion dollars.

Proctor Gamble's shares finished down 42 cents at 62.88 dollars amid the wider market losses.

Bond prices rose as investors deserted stocks. The yield on the 10-year US Treasury bond fell to 4.700 percent from 4.753 percent Thursday and that on the 30-year bond dropped to 4.867 percent from 4.899 percent.

Bond yields and prices move in opposite directions.