U.S. Stocks Drop, S&P 500 Sinks Most Since 2001 Terror Attacks (Lynn Thomasson & Elizabeth Stanton)

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(Bloomberg) -- U.S. stocks tumbled, pushing the Standard & Poor's 500 Index to the steepest drop since the September 2001 terrorist attacks, as Lehman Brothers Holdings Inc.'s bankruptcy and declining commodities increased speculation that credit-market losses and the economic slowdown will worsen.

Lehman plunged 94 percent and American International Group Inc. sank 61 percent after more than $25 billion in losses from subprime-related investments in the last four quarters made with mostly borrowed money. Economic concerns pushed down oil, prompting a drop in energy stocks, and sent General Electric Co. to an 8 percent retreat. Stocks erased more than $600 billion in value as financial shares in the S&P 500 decreased the most since at least 1989, according to data compiled by Bloomberg.

``Fear is in charge,'' said Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $70 billion. ``This blows another hole in the banking system's ability to extend credit.''

The S&P 500 declined 58.17 points, or 4.7 percent, to 1,193.53, the lowest level since October 2005. The Dow Jones Industrial Average tumbled 504.48, or 4.4 percent, to 10,917.51. The drop followed a slump across Europe and Asia. The dollar weakened the most against the yen since 1999 and two-year Treasury notes surged the most in seven years.