American stocks declined and the Standard & Poor’s 500 Index posted its steepest two-day slump since June after wholesale prices rose faster than economists estimated, housing starts decreased, and concern grew that the nation’s biggest financial firms will report more losses.

American International Group Inc., the largest insurer, retreated 5.9% and Lehman Brothers Holdings Inc., the biggest mortgage-bond underwriter, sank 13% as analysts warned of added writedowns from bad real-estate loans. Centex Corp. and Pulte Homes Inc. sent builders to a three-week low as construction began on the fewest homes in 17 years. Saks Inc. fell the most since March after saying sales will miss forecasts.

The S&P 500 lost 11.91, or 0.9%, to 1,266.69. The Dow Jones Industrial Average declined 130.84, or 1.1%, to 11,348.55. The Nasdaq Composite Index slipped 32.62, or 1.4%, to 2,384.36. More than three stocks dropped for each that rose on the New York Stock Exchange.

“With the continued bad news from the financial sector, some retail information that was disappointing and no sign of improvement in housing, everything is bumping along the bottom,” a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion, John Carey, said. “Every sensible person should be at the beach today.”

A government report before the market opened that showed prices paid to American producers rose 1.2% in July, twice the median economist estimate, “spooked people a bit,” Mr. Carey added.

Only 1.01 billion shares traded on the NYSE, or 27% less than the three-month daily average. Yesterday was the slowest full session since December 27, with 986 million shares changing hands.

The S&P 500 is down 19% from an October record after the biggest American housing slump since the Great Depression slowed consumer spending and spurred turmoil in credit markets. America has fallen into a recession that may topple some of the nation’s biggest banks, the former chief economist at the International Monetary Fund, Kenneth Rogoff, said yesterday.

“The worst is yet to come in the U.S.,” a Harvard University professor of economics, Mr. Rogoff, said during an interview in Singapore. “The financial sector needs to shrink; I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.”

The American housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest American securities firm. Mr. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation’s biggest mortgage-finance companies, which have lost more than 85% of market value in 2008.

AIG fell the most in the Dow average, decreasing $1.28 to $20.32. Goldman Sachs Group Inc. said it’s “increasingly likely” the insurer will have to raise more capital. AIG may have to pay $20 billion on credit-default swaps that the company sold to protect fixed-income investors against losses, resulting in rating-firm downgrades and a “large scale” capital raise, analyst Thomas Cholnoky said in a note yesterday.

Lehman lost $1.96 to $13.07. The fourth-biggest American securities firm may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, according to JPMorgan Chase & Co.