NEW YORK - US stocks tumbled on Thursday after a series of fresh jolts to credit markets and lacklustre retail sales compounded worries the economy is near recession, driving the benchmark Standard & Poor's 500 down 2.2 per cent to its lowest closing level in 18 months.

Investors stormed out of stocks and into the perceived safety of government bonds at a pace last seen in mid-January just before the US Federal Reserve stepped in with an emergency interest-rate cut.

A main catalyst for the move was news that Thornburg Mortgage Inc , a 'jumbo' mortgage lender, was in default after failing to meet creditor demands for more upfront cash. Thornburg shares plunged 51.5 per cent to US$1.65 (S$2.30).

A report showing that US mortgage foreclosures hit a record high in late 2007 added to the gloom, sending the S&P financial index down 3.7 per cent in its sixth straight daily decline.

Shares of Citigroup, the largest US bank by assets, led financial-sector drags on the S&P 500 with a drop of 4.4 per cent. Shares of insurer American International Group slid 3.9 per cent and were the heaviest financial weight on the Dow.

'We are dealing with a market that at this point is still very, very jittery, wondering what's going to come out of the closet next,' said Mr Frederic Dickson, senior vice president and market strategist at D.A. Davidson & Co in Lake Oswego, Oregon. 'Investors seem to be moving to the safest instruments around or just diving into their fox holes. This looks pretty much like an across-the-board sell-off.'

The Dow Jones industrial average slid 214.60 points, or 1.75 per cent, to 12,040.39. The Standard & Poor's 500 Index tumbled 29.35 points, or 2.20 per cent, to 1,304.35. The Nasdaq Composite Index fell 52.31 points, or 2.30 per cent, to 2,220.50 - its lowest close since September 2006.

The S&P 500, which is off 16.7 per cent from its record closing high in October, sank below its previous 2008 closing low set on Jan 22 when the US Federal Reserve made an emergency interest-rate cut in its efforts to ease credit market strains and get a sputtering economy going.

Thornburg Mortgage said it had received a letter from JPMorgan Chase & Co notifying it of a default after it failed to meet a margin call of about US$28 million.

Wall Street's sell-off came a day before the scheduled release of the government's non-farm payrolls report, expected to show the US job market probably rebounded in February from the previous month's contraction, but not enough to keep the unemployment rate from rising.

Economists expect the report due on Friday to show non-farm payrolls rose by 25,000 in February, recovering from a drop of 17,000 in January. However, the estimates for February ranged widely from a fall of 110,000 to a rise of 100,000.

Adding to concerns about the financial sector, a Dutch-listed affiliate of private equity firm Carlyle Group said it has not been able to meet some margin calls and has received a notice of default.

Shares of Citigroup ended at US$21.17 on the New York Stock Exchange as the largest US bank by assets said it aims to cut its home loan exposure by US$45 billion, reduce risk and save US$200 million a year in an overhaul of its US residential mortgage business.

Shares of AIG, the world's largest insurer, finished at US$42.88, just a nickel above a five-year low.

Shares of JPMorgan, the No. 3 US bank, ended down 3.4 percent at $37.37, while shares of Bank of America Corp , the No. 2 US bank, fell 2.7 per cent to US$36.52.

The Mortgage Bankers Association said US home foreclosures and the rate of homes entering foreclosure hit record highs in the fourth quarter of 2007.

Shares of hard-hit bond insurer Ambac Financial Group dropped 14.7 per cent to US$7.42. Ambac's slide followed concern that the company's plan to raise capital may not give it enough cash to shore up its credit-worthiness in the long run.

Banks have made a firm commitment to buy more than US$500 million of Ambac's shares in a planned US$1.5 billion offering - if other investors don't buy them, according to a person briefed on the matter.

Before the opening bell, Goldman Sachs cut price targets on the shares of Ambac and another bond insurer MBIA. Goldman also said Ambac's capital plan announced Wednesday would fall US$1 billion short of an estimated requirement. MBIA shares dropped 5.5 per cent to US$11.60.

Shares of US home finance companies Fannie Mae and Freddie Mac fell to their lowest levels in more than a decade as concerns about fallout from the housing slump rattled investors. Fannie Mae dropped 10.7 per cent to US$21.70 and shares of Freddie Mac tumbled 6.9 per cent to US$20.14.

Four mortgage real estate investment trusts, or REITs, ranked among the biggest decliners on the New York Stock Exchange, including Anworth Mortgage Asset Corp . Its shares plunged 29.6 per cent to US$6.23.

Only one of the Dow's 30 components finished higher.

Wal-Mart Stores Inc stock rose 0.8 per cent to US$49.98 after the world's largest retailer beat sales estimates.

Volume was moderate on the New York Stock Exchange, where about 1.62 billion shares changed hands, below last year's estimated daily average of 1.9 billion shares. On the Nasdaq, about 2.23 billion shares traded, above last year's daily average of 2.17 billion.

Declining shares outnumbered advancing ones on the NYSE by a ratio of about 7 to 1, while on the Nasdaq, about four stocks fell for every one that rose. -- REUTERS