The downgrades, combined with a report showing slower-than-expected factory orders, hurt economically sensitive sectors such as banks, home builders and retailers.

Last week, the same groups had powered Wall Street's biggest weekly rally in five years.

American Express, whose stock fell nearly 4 per cent, was a top drag on the Dow after UBS cut its rating on the shares to 'sell,' saying its outlook for a recession in the first half of 2008 would lead to higher levels of unemployment.

'These last few weeks have been very cyclical, and in my opinion it's too early to be cyclical because you're going to have some slower economic news that's going to continue for a while,' said Mr Scott Wren, senior equity strategist at AG Edwards & Sons Inc in New York.

The Dow Jones industrial average was down 108.03 points, or 0.85 per cent, at 12,635.16. The Standard & Poor's 500 Index was down 14.60 points, or 1.05 per cent, at 1,380.82. The Nasdaq Composite Index was down 30.51 points, or 1.26 per cent, at 2,382.85.

AmEx shares fell 3.9 per cent to US$47.66 (S$67.40). UBS also cut its ratings on credit card issuers Capital One Financial Corp, down 7.6 per cent to US$52.65, and Discover Financial Services, down 9 per cent to US$16.34.

Brokerages cut shares of Wells Fargo & Co, the No. 2 US mortgage lender, whose stock fell 6.7 per cent to US$31.39, and Wachovia Corp, the fourth-largest US bank, whose stock was down 8.3 per cent at US$35.53.

Blue-chip bank JPMorgan Chase was the top drag on the Dow. The stock fell down 4.2 per cent to US$46.22.

Data showed new orders at US factories rose at a slower-than-expected 2.3 per cent rate last month. After stripping out the transportation sector, the gain was a modest 0.7 per cent, adding to unease about the economy's outlook.

Shares of Google fell 4 per cent to US$495.43 and were the biggest drag on the Nasdaq.

Internet media company Yahoo Inc, following software maker Microsoft Corp's US$44 billion bid, would consider a business alliance with Web search company Google Inc as one way to rebuff the takeover proposal, a source familiar with Yahoo's strategy said on Sunday.

Yahoo stock was up 3.3 per cent to $29.33.

Declining stocks outnumbered advancing ones by a ratio of about 3 to 2 on the New York Stock Exchange and by 4 to 3 on Nasdaq.

Trading was extremely light on the NYSE, with about 1.36 billion shares changing hands, well below last year's estimated daily average of 1.9 billion, while on Nasdaq, about 2.05 billion shares traded, compared with last year's daily average of 2.17 billion.

Traders said the New York Giants' Super Bowl win contributed to lighter volume, with some traders opting to take the day off. -- REUTERS