US STOCKS-Economy worries drive Wall Street lower

NEW YORK (Reuters) - U.S. stocks dropped Friday after heavy equipment maker Caterpillar Inccut its profit forecast and warned the housing downturn was spreading to other parts of the economy.

With investors mindful of the 20th anniversary of the stock market crash on Black Monday, major indexes fell more than 1 percent as Caterpillar said key industrial sectors it serves were in recession.

The bleak comments from Caterpillar, which fell 3.6 percent, helped drag down the shares of other big manufacturers, including 3M Co. -- off 6.5 percent.

Crude oil prices falling from record highs drove energy companies' shares down, contributing to investors' shift from stocks to the relative safety of U.S. government debt.

"There was some disappointing earnings news from industrials such as Caterpillar," said Jeffrey M. Mortimer, chief investment officer in equities at Charles Schwab Investment Management, in San Francisco.

"The market is trying to figure out how strong the economy is, if we're in for a 'soft landing' or potentially heading towards a recession."

The Dow Jones industrial average was down 178.10 points, or 1.28 percent, at 13,710.86. The Standard & Poor's 500 Index was down 18.16 points, or 1.18 percent, at 1,521.92. The Nasdaq Composite Index was down 36.18 points, or 1.29 percent, at 2,763.13.

At its session low hit earlier in the day, the Dow was down 247.77 points, or 1.78 percent, from Thursday's close.

The market's decline coincided with the 20th anniversary of "Black Monday," when the Dow industrials fell 23 percent on Oct. 19, 1987. That still stands as the Dow's biggest percentage drop on record.

Wachovia Corp, the fourth-largest U.S. bank, posted a 10 percent drop in quarterly profit, hurt by $1.3 billion of write-downs at its investment banking unit as credit markets tightened. Wachovia lost 1.3 percent to $47.50 on the New York Stock Exchange.

Soft North American results knocked down the shares of Schlumberger, the world's largest oil service company, which fell 10.1 percent to $100.38. This was the biggest percentage drop in Schlumberger's stock price since February 2001. Other oil and gas services companies' shares also dropped.

Caterpillar said several industries it serves were in recession and machinery sales to nonresidential builders were declining as fast as sales to residential builders, which it described as in "severe recession." Caterpillar fell 3.6 percent to $74.87.

Shares of 3M Co, another company considered a bellwether for the U.S. economy, fell 6.5 percent to $88.61 as investors worried about falling profits in the LCD television market.

Exxon Mobil Corpshares dropped 1.1 percent to $93.99 as U.S. crude shed 67 cents to $88.80 after rising to a record $90.07 a barrel overnight. (Additional reporting by Ellis Mnyandu)