US stocks suffered a late afternoon plunge on Tuesday as downbeat news from AT&T and more trouble in the housing market raised fresh fears over the health of the US economy.

Major stock indices closed down about 2 per cent, meaning they have fallen more than 10 per cent from their 52-week highs, constituting what stock market analysts call a correction.

Shares in Countrywide Financial (NYSE:CFC), the largest US mortgage lender, closed 28 per cent lower at $5.47 even after the company strongly denied rumours it would file for bankruptcy protection and could face rating downgrades. Countrywide shares once traded above $45.

The S&P financials index fell 3.65 per cent and the investment banking index lost 4.1 percent. Bear Stearns shares dropped nearly 7 per cent on uncertainty about the investment bank's future leadership and the ongoing impact of the mortgage crisis.

Bear confirmed on Tuesday after the close of trading that Jimmy Cayne would step down as chief executive, effectively immediately, but would remain as chairman of the board following heavy losses. He will be succeeded as chief executive by Alan Schwartz, Bear's president and a long-time corporate adviser.

AT&T shares fell nearly 4.6 per cent after the telecoms group said it was disconnecting more customers because of unpaid bills.

The National Association of Realtors said pending home sales fell 2.6 per cent in November after two months of small gains. The report suggested the decline in the US house market, a critical pillar of the economy, has further to run.

The S&P 500 index closed 1.8 per cent lower at 1,390.19. The Dow Jones Industrial Average slid 238.42, or 1.9 per cent, to 12,589.07, while the Nasdaq Composite index dropped 58.95, or 2.4 per cent, to 2,440.51.

Treasury bonds reversed early weakness as the tone in stocks darkened. The yield on the 10-year US Treasury note was down 5bp at 3.78 per cent, having traded at 3.89 per cent earlier in the day. The two-year yield was 2bp lower at 2.726 per cent, reversing an earlier rise to 3.82 per cent. The price of gold rose as high as $880.20, a new record, while the benchmark US oil futures climbed $1.24 a barrel to trade at $96.33.