THE DOW Jones industrial average plunged below 7,000 yesterday for the first time in more than 11 years as investors grow even more pessimistic about the health of banks and, in turn, the economy.

A staggering US$61.7 billion in quarterly losses at insurer American International Group Inc touched off fresh fears about the health of the nation's financial system.

The worries pushed the blue chips below 7,000 for the first time since October 28, 1997, and then below 6,900 for the first time since May 1, 1997. The credit crisis and recession have now slashed half the average's value since it hit a record high over 14,000 in October 2007.

Investors are fleeing financials after the government said it would give AIG another US$30 billion in loans, besides the US$150 billion it has already injected into the company. Investors are worried about European financial companies, too. HSBC PLC, Europe's largest bank by market value, reported a 70 per cent drop in 2008 earnings and said it needs to raise US$17.7 billion and cut 6,100 jobs.

Housing market the game-changer

"As bad as things are, they can still get worse, and get a lot worse," said Bill Strazzullo, chief market strategist for Bell Curve Trading. Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.

The 'game-changer' he said, will be the housing market and whether it can stabilise.

In mid-day trading, the Dow fell 226.52, or 3.2 per cent, to 6,836.41. The Dow last closed below the 7,000 level on May 1, 1997.

Broader stock indicators also slid. The Standard & Poor's 500 index fell 26.19, or 3.6 per cent, to 708.90, and the Nasdaq composite index fell 38.84, or 2.8 per cent, to 1,339.00.

The Russell 2000 index of smaller companies fell 16.81, or 4.3 per cent, to 372.21.

Nearly 10 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 758.9 million shares.

Bond prices jumped as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, tumbled to 2.90 per cent from 3.02 per cent late Friday. The yield on the three-month T-bill, considered one of the safest investments, slipped to 0.24 per cent from 0.25 per cent Friday.