By Eric Martin Oct. 16 (Bloomberg) -- U.S. stocks retreated for a third day, erasing the gains from the biggest rally in seven decades, after Citigroup Inc. said bad loans may rise to a record high and the government said manufacturing fell the most since 1974. Citigroup declined 8.8 percent after saying loss rates on credit cards and mortgages may climb as the economy deteriorates. American Express Co., the largest U.S. card network by purchases, slid 8.9 percent. General Electric Co., the world's biggest industrial company, lost 3.6 percent and extended its plunge over the past month to 26 percent. ``The frozen credit markets and the shock coming out of these stresses we've had in the capital markets have exacted a toll on the real economy,'' U.S. Treasury Secretary Henry Paulson said in an interview with Bloomberg Television. ``We've seen that in some of the numbers recently. We're going to have a number of tough months here.'' The Standard & Poor's 500 Index declined 40.29 points, or 4.4 percent, to 867.55 at 11:12 a.m. in New York, below its lowest close since April 2003. The Dow Jones Industrial Average slid 356.26, or 4.2 percent, to 8,221.65. The Nasdaq Composite Index slipped 54.93 to 1,573.4. Ten stocks dropped for each that rose on the New York Stock Exchange. The retreat over the past three days erased all of the 12 percent gain in the S&P 500 on Oct. 13, when the market rallied the most since the 1930s on speculation the government's plan to shore up banks will ease the credit crisis. Efforts to calm financial markets probably won't result in an immediate economic rebound, Federal Reserve Chairman Ben S. Bernanke told the Economic Club of New York yesterday. Citigroup, American Express The S&P 500 has tumbled 40 percent in 2008 as losses and writedowns from mortgage-related investments at financial firms worldwide topped $646 billion. The measure has retreated 27 percent since Sept. 26. Citigroup fell $1.32 to $14.91. American Express retreated $2.18 to $22.23, the biggest loss in the Dow. Stocks erased gains from pre-market trading after the Federal Reserve said industrial production in the U.S. fell in September by the most in almost 34 years as hurricanes and an aircraft strike combined with the credit crunch to weaken manufacturing. A separate report showed manufacturing in the Philadelphia region dropped more than economists estimated to the lowest since 1990. `Obliterated' EBay Inc. dropped 8.4 percent to $14.05. The biggest Internet auctioneer reduced its annual earnings forecast as growth slows at the company's namesake Web sites. EBay forecast fourth-quarter revenue of $2.02 billion to $2.17 billion, compared with $2.18 billion a year earlier. The value of goods sold on EBay's sites fell 1 percent in the third quarter, the first drop in the company's history, as international markets declined as much as the U.S. All 10 S&P 500 industries fell more than 6 percent yesterday. About $1.1 trillion in value was erased from all U.S. equities. The declines came after a drop in retail sales was almost twice economists' estimates, sending Macy's Inc. and Dillard's Inc. down more than 15 percent. The Fed's index of New York manufacturing slumped to minus-24.6, a record low. The data overshadowed a retreat in money-market rates and better-than- estimated earnings reports from JPMorgan Chase & Co., Coca-Cola Co. and Intel Corp. ``The financial sectors of the global equity market have just been obliterated, but the non-financial segments have held up relatively well,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said during a Bloomberg Television interview. ``Earnings are still quite optimistic in terms of expectations for non-financials. The bear market, to the extent it continues, shifts from financials to non-financials.'' The economy deteriorated throughout the U.S. last month and pessimism about the outlook spread, the Fed said in its regional economic survey yesterday. Retailing, auto sales and tourism declined in ``most'' districts, while housing and construction ``weakened or remained low,'' according to the Beige Book report, published two weeks before officials meet to set interest rates. To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

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