American stocks tumbled, pushing the Standard & Poor’s 500 Index to the steepest drop since the terrorist attacks of September 11, 2001, as Lehman Brothers Holdings Inc.’s bankruptcy and declining commodities increased speculation that credit-market losses and the economic slowdown will worsen.

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. American International Group Inc. sank 61% and Washington Mutual Inc. decreased 27%. Concern America is heading for a recession pushed oil lower, prompting a drop in energy stocks, and sent General Electric Co. down 8%.

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

The S&P 500 declined 59 points, or 4.7%, to 1,192.70, the lowest level since October 2005. The Dow Jones Industrial Average tumbled 504.48, or 4.4%, to 10,917.51. The MSCI World Index of developed-market equities slumped the most in six years while the 7.6% drop in Brazil’s Bovespa was the steepest since September 11, 2001. The dollar weakened the most against the yen in a decade and two-year Treasury notes surged.

More than 24 stocks slipped for each that rose on the New York Stock Exchange on concern financial shares will continue their slump. The S&P 500 has fallen 23% since an October record as bank losses from the first nationwide decline in American home values since the Great Depression reached $514.6 billion.

“It really goes to the heart of the financial system,” a senior portfolio strategist at Russell Investment Group in New York, Stephen Wood, said. “It’ll be one of those days where people say in 10 years, ‘Do you remember where you were?'”

The Dow average pared its decline by half at midday in New York after plunging more than 330 points in the first 30 minutes of trading. Losses accelerated at 2 p.m. when Treasury Secretary Paulson said America wasn’t considering a “bridge loan” to bail out AIG.

GE, which makes power-plant turbines and jet engines and offers commercial loans, retreated $2.15 to a five-year low of $24.60. The company may miss profit estimates because of credit-market turmoil, according to Citigroup Inc.

Caterpillar Inc., the world’s largest maker of construction equipment, fell 3.4 percent to $63.21. AK Steel Holding Corp. slumped 19% to $31.82.

Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 24% to 31.70, the highest since the March bailout of Bear Stearns Cos. The VIX measures the cost of using options as insurance against declines in the S&P 500.

“We need to get to the bottom of the credit crisis before financials are the sort of place that we want to put a lot of money,” the chief investment strategist at Key Private Bank in Cleveland, which oversees about $30 billion, Bruce McCain, said.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94% of its market value this year. Lehman sank to 21 cents.

Citigroup Inc., the largest American bank by assets, declined 15% to $15.24 for the steepest drop since July 2002. Bank of America retreated 21%, the most since at least July 1982, to $26.55 after agreeing to purchase Lehman rival Merrill Lynch & Co. for $50 billion. American Express Co., the biggest American credit card company by purchases, fell 8.9% to $35.48.

“It’s all basically going down the drain,” the deputy director for investment strategy at Axa Investment Managers in Paris, Franz Wenzel, said. “The rhythm of the shoes that drop has accelerated. That’s what we follow with caution.”

AIG lost $7.38 to $4.76, the lowest price since June 1988. The biggest American insurer fell after failing to present a plan to raise capital and stave off credit downgrades. AIG may need to raise $20 billion in capital and sell $20 billion of assets to ease a cash crunch brought on by the collapse of American mortgage markets, people familiar with insurer’s plans said.

Goldman Sachs Group Inc. fell 12%, the most since April 2000, to $135.50. JPMorgan Chase & Co. retreated 10% to $37. Their shares were downgraded by Merrill Lynch.

Goldman Sachs was cut to “neutral” on the likelihood Lehman’s bankruptcy will reduce profitability for the biggest American securities firm. The analysts cut their recommendation on JPMorgan to “underperform” and predicted the lender will report a third-quarter loss.

Morgan Stanley, the biggest American securities firm other than Goldman Sachs, fell 14% to $32.19.