NEW YORK - US stocks dropped on Thursday as the credit crunch surfaced unexpectedly in the municipal bond market and after the Federal Reserve chairman said that he sees sluggish economic growth ahead.

Worries about a deteriorating credit market were exacerbated when Moody's Investors Service slashed its rating on bond insurer FGIC Corp. The move could lead to even more write-downs at banks that own securities covered by the company.

In testimony before a congressional committee, Fed Chairman Ben Bernanke acknowledged the outlook for the economy had worsened in recent months and said risks to growth had picked up.

'There's just a tremendous amount of fear about how many more credit market shoes are going to drop. Corporates are being affected, munis are impacted,' said Mr Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.

'There's a stench of fear that refuses to break.' Stocks ended a three-day string of gains as the Dow Jones industrial average. DJI fell 175.09 points, or 1.39 per cent, at 12,377.15. The Standard & Poor's 500 Index .SPX was down 18.34 points, or 1.34 per cent, at 1,348.87. The Nasdaq Composite Index .IXIC dropped 41.39 points, or 1.74 per cent, at 2,332.54.

Technology shares were another drag as Goldman Sachs removed Intel Corp from a list of its top picks, saying economic weakness may hurt demand for the chip maker's products.

Graphics chip maker NVIDIA Corp added to concerns about the sector after it reported weaker margins for the first time in more than 3 years.

Intel shares fell 3.5 per cent to US$20.46 (S$29), while Nvidia tumbled 16.3 per cent to US$22.61. The Philadelphia Stock Exchange semiconductor index .SOXX fell 2.8 per cent.

Adding to unease in the financial sector, Swiss bank UBS revealed tens of billions of dollars in risky debt exposure.

US-listed shares of UBS were among the biggest decliners on the New York Stock Exchange, down 8.3 per cent at US$33.94.

Mr Bernanke said he saw no imminent threat of bank insolvencies but said more write-downs are likely.

FGIC, the fourth-largest bond insurer, is owned by a group including mortgage insurer PMI Group Inc and private equity firm Blackstone Group. Blackstone shares fell 4.7 per cent to a record low of US$16.83.

Other decliners in the financial sector included JPMorgan Chase & Co, down 3.4 per cent to US$42.61 and Bank of America Corp, down 2.5 per cent to US$42.24.

Apparel retailers tumbled after Liz Claiborne Inc forecast a big shortfall in fourth-quarter operating profit.

Liz Claiborne shares dropped 18.4 per cent to US$18.31. Jones Apparel Group Inc stock dropped 9.9 per cent to US$15.45 and AnnTaylor Stores shares lost 5.4 per cent to US$24.44.