American stocks fell, dragging down the Standard & Poor’s 500 Index from a four-month high, as analysts forecast more credit losses, and faster inflation and record oil prices threatened to reduce profitability.

Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. led financial shares to a third straight decline as Oppenheimer & Co. analyst Meredith Whitney said banks may write off more than $170 billion of additional reserves by the end of 2009. The world’s largest insurer, American International Group Inc., slid to the lowest level since 1998 on plans to raise more capital. Home Depot Inc. had its worst tumble in nine months after profit slumped 66%.

The S&P 500 lost 13.23 points, or 0.9%, to 1,413.4, its biggest drop since May 7. The Dow Jones Industrial Average sank 199.48, or 1.5%, to 12,828.68. The Nasdaq Composite Index decreased 23.83, or 1%, to 2,492.26. More than two stocks retreated for each that rose on the New York Stock Exchange.

“There are still some serious credit issues that need to be worked through in a weakening economy driven by a weaker consumer,” Leo Grohowski, who helps oversee $162 billion as chief investment officer at Bank of New York Mellon Wealth Management, told Bloomberg Television. “Some of the liquidity fears that were really driving the market down have been minimized, but we are in the midst of a credit crunch.”

Seven of 10 industries in the S&P 500 dropped after the Labor Department reported a 0.4% gain in producer prices excluding food and fuel in April, twice as big as economists had forecast. A gauge of U.S. stock-market volatility rose the most in almost two weeks. Shares fell in Europe and Asia as record oil weighed on the outlook for earnings.

The S&P 500 is still 11% above its 19-month low reached March 10 after the Federal Reserve helped bail out American banks and earnings at two-thirds of the companies in the index beat analysts’ estimates.

JPMorgan lost $2.29, or 5%, to $43.70. Ms. Whitney, who correctly predicted on October 31 that Citigroup Inc. would cut its dividend and has a “perform'” rating on JPMorgan, lowered earnings estimates for the American banking sector “significantly.”

“The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,” analysts including Ms. Whitney wrote in a research note.

The Oppenheimer analysts cut their estimates for 2008 earnings for Bank of America, Citigroup, JPMorgan, Wachovia Corp., and Wells Fargo & Co. by an average of 17%, and reduced their 2009 estimates by 20%. In all, the banks’ earnings will be 72% lower than the Thomson First Call consensus forecast, Oppenheimer estimates.

Citigroup lost 3.8% to $22.11. Bank of America retreated 2% to $35.39. Wells Fargo slid 1.5% and Wachovia tumbled 2.3%. The S&P 500 Financials Index retreated 2.2% as 87 of its 92 companies fell.

AIG dropped 2.1% to $38.12. The insurer will raise a total of $20 billion, 60% more than it originally said it needed to protect against further writedowns, its chief executive officer, Martin Sullivan, said.

Goldman Sachs Group Inc. slipped $1.97 to $182.43 and Morgan Stanley lost $1.40 to $44.80. Losses from hedging may weigh on Goldman and Morgan Stanley, according to analysts at smaller rival Lehman Brothers Holdings Inc., who cut their second-quarter earnings estimates for the two biggest U.S. securities firms. Bloomberg News