Wall Street stocks were lower on Thursday as commodity prices hit fresh highs, the dollar sank to all-time lows and an onslaught of bad news in the credit markets rattled traders.

The benchmark S&P 500 fell 1.4 per cent to 1,315.17 in midday trade, while the Dow Jones Industrial Average shed 1.1 per cent to 12,115.21. The Nasdaq composite fell 0.9 per cent to 2,253.12.

"We're in part reacting to yesterday's big move in crude [oil] and the decline in the dollar," said Mark Pado, US market strategist at Cantor Fitzgerald.

"People are also nervous about the jobs number due [Friday] - it might be the other shoe to drop after a string of weak economic data."

On the corporate front, Thornburg Mortgage (NYSE: TMA - News) plummeted 58.4 per cent to $1.45 after analysts said the specialist in exotic home loans faced bankruptcy because it had defaulted on financing agreements.

The lender said on Thursday it had received a default notice from JPMorgan after failing to meet a $28m request for more collateral. That notice triggered cross-defaults on agreements Thornburg had with other lenders.

The disclosure could lead Thornburg to file for bankruptcy, according to RBC Capital Markets analyst Jason Arnold.

"Thornburg now appears to be on the ropes, and barring a sizeable capital injection (which is possible but seems very unlikely at this point, in our view) we see little in the form of upside," Mr Arnold said. RBC cut its price target on the stock to $1, saying there was limited value remaining for shareholders.

Financial stocks sold off after Eric Rosengren, Boston Federal Reserve president, reiterated chairman Ben Bernanke's call for banks and other lenders to write down the principal on home loans to aid borrowers in distress.

Mr Rosengren said he expected home values to continue falling, adding "significant further declines in home prices could greatly complicate efforts to resolve current problems".

The index of financial stocks in the S&P 500 fell 2.8 per cent to a five-year low, while the investment banking sector fell 4 per cent.

JP Morgan shed 3.8 per cent to $37.28, while Merrill Lynch fell 6.2 per cent to $46.26. Lehman Brothers (NYSE: LEH - News) fell 4.2 per cent $46.05 after the bank said it suspended two London-based traders on the equity derivatives desk due to "issues" with some of their trades.

Washington Mutual (NYSE: WM - News) fell for a seventh consecutive session after Standard & Poor's lowered its credit ratings on the largest saving and loans company and said another cut was possible. Shares lost 6.2 per cent to $12.00.

Ambac fell 8.6 per cent to $7.95 as investors reacted to its plan to raise $1.5bn by issuing common stock and equity instruments. People familiar with the situation said the transaction was expected to price after the market closed.

Ambac's plan disappointed the market, which had been led to expect banks would inject up to $3bn in fresh capital. "The 'failed' bailout highlights the fact that there is no willingness among investors to buy into troubled monoliners," UniCredit said. "The market is desperately waiting for a 'white knight' to come to the rescue."

JP Morgan analyst Andrew Wessel said Ambac might have to raise still more capital to avoid losing its triple-A ratings.

The government-chartered mortgage lenders Fannie Mae (NYSE: FNM - News) and Freddie Mac continued their week-long decline. Fannie Mae, the larger of the two, fell 8.5 per cent to $22.22. Freddie Mae fell 7.1 per cent to $20.11. Earlier, Treasury sources told CNBC there was no basis to rumours the government would step in and offer an explicit backing to the lenders.

The homebuilders sector fell 7 per cent after the Mortgage Bankers Association said foreclosures hit an all-time high at the end of 2007. Centex (NYSE: CTX - News) fell 7.8 per cent to $20.55, while Pulte Homes (NYSE: PHM - News) fell 7 per cent $12.20. DR Horton fell 7.7 per cent to $13.16.

But Wal-Mart (NYSE: WMT - News) provided some cheer: the world's biggest retailer reported a better-than-expected 2.6 per cent rise in February sales at US stores open at least a year, due to strong sales of groceries, medicines and electronics. Wal-Mart shares rose 1.2 per cent to $49.94.