Stocks sank in thin trading Monday as worries about the credit ratings of American International Group Inc weighed on the financial sector.

The major indexes fell more than 1.5 per cent, including the Dow Jones industrial average, which was off more than 200 points.

Bond prices jumped as investors fled to the safety of government debt.

AIG was the steepest decliner among the 30 stocks that make up the Dow industrials after a Credit Suisse analyst cut his price target on the world's largest insurer and after Fitch Ratings warned late Friday that it might cut its ratings on the company, which has been buffeted by investors' distaste for some of the types of complex debt instruments on AIG's books.

The financial sector has struggled in part because of a spike in the number of homeowners who have fallen behind on their mortgage payments.

Unsold properties

A report Monday by a trade group for real estate agents showed that the number of unsold properties rose to an all-time high in July.

The National Association of Realtors' report that sales of existing homes increased 3.1 per cent was better than Wall Street expected, but investors appeared generally unimpressed by the overall findings.

The news arrived as volume remains light, with many traders on vacation for the last week of August. Sean Simko, head of fixed income management SEI Invest-ments, said that the stock and bond markets are likely showing outsize reactions because of the thin stream of trades.

"There's just too much uncertainty out there creating all this volatility. And what's adding to the volatility is we're entering this holiday period. The swings are exaggerated by the light volumes," he said.

In mid-afternoon trading, the Dow industrials fell 206.97, or 1.78 per cent, to 11,421.09. The Dow surged nearly 200 points Friday as oil tumbled more than $6 a barrel - its biggest percentage drop in more than four years - and after Federal Reserve Chairman Ben Bernanke said inflation pressures are likely to moderate.

Stock indicators

Broader stock indicators also fell Monday. The Standard & Poor's 500 index declined 22.02, or 1.70 per cent, to 1,270.18, and the Nasdaq composite index fell 46.04, or 1.91 per cent, to 2,368.67.

The Russell 2000 index of smaller companies fell 16.48, or 2.23 per cent, to 721.12.

Bonds jumped Monday as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.78 per cent from 3.87 per cent late Friday.