The Standard & Poor’s 500 index finally tipped into bear market territory yesterday, for the first time in six years, amid general fears about the impact that the slowing economy will have on company profits.

The S&P 500 lost 29.00 points, or 2.3 per cent, to close at 1,244.70, with financial groups among the biggest fallers amid concerns about the housing market and related credit crunch on their businesses.

The index joins the Nasdaq and Dow Jones indices, which both last week entered bear territory — defined as a decline of at least a fifth since the previous peak, which was reached in October last year.

Fannie Mae and Freddie Mac, two government-sponsored companies that buy mortgages, keep some and package others into securities, which they sell, led financial shares to their biggest tumble in six years. Fannie shares dropped by 13.1 per cent, while Freddie tumbled by 23.8 per cent because of fears about the valuation of mortgage-related investments at a time when the housing crisis shows no sign of abating.

Moreover, Credit Suisse unsettled investors in financial stocks further when it forecast that 40 per cent of America’s biggest lenders would need to cut dividends or raise more capital to repair the damage to their balance sheets inflicted by the credit crunch.

Merrill Lynch fell by 9.3 per cent, after Fitch said it may cut its debt rating. Lehman Brothers declined by 11.4 per cent as investors continued to fret about the group’s liquidity.

Away from financial stocks, Cisco Systems, the maker of computer networking equipment, dropped by 5.7 per cent, to its lowest level since September 2006 and Intel, the chipmaker, fell to a six-month low as analysts gave warning that the weakening economy could drive down revenues. The Nasdaq Composite Index fell by 59.55 points, or 2.6 per cent, to close at 2,234.89. The Dow Jones lost 236.8, or 2.1 per cent, to end the day at 11,147.4.

Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama, said: “There is uncertainty about financials as we are going into the earnings season wondering about what write-offs and capital raising might be needed. There is also concern that as the earnings reports come out, that the projections for future performance for technology may not be as strong due to the weakness in the economy,”

Google shares dipped by 2.3 per cent after reports that the search group’s projected advertising revenue from its YouTube video-sharing web site will fall short of company forecasts. Yahoo!, which had climbed on Tuesday on renewed hopes of a deal with Microsoft, fell by 3.3. per cent, while Microsoft dropped 2.4 per cent.

In a further credit-crunch related development, it emerged yesterday that Bloomberg, the eponymous financial information and media group set up by the Mayor of New York, is close to buying a 20 per cent stake of its own shares from Merrill Lynch for about $5 billion (£2.52 billion). Although a deal could fall apart, Mr Bloomberg, who owns 72 per cent of the group that he founded, is understood to be keen to buy Merrill Lynch’s stake.

Merrill Lynch is keen to sell assets to plug the gaps in its balance sheet after suffering more than $30 billion of losses on investments in sub-prime mortgages. The brokerage is also thought to be considering selling part of its 49.8 per cent stake in BlackRock, America’s largest public asset management group. That holding is worth roughly $10 billion. Merrill Lynch is understood to be keen to secure an asset sale before it releases its second-quarter profits on July 17.

Analysts expect Merrill to announce a further $6 billion of investment writedowns for the quarter, and the broker is keen to appease investors by having a similar-sized amount of cash ready to plug the gap. However, analysts said that Merrill may look to raise substantially more than $6 billion to provide a cushion against further losses in the third and fourth quarters.

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