US STOCKS-Financial fears, high inflation rattle Wall St

* Financials lead market lower on credit worries

* Write-downs seen at Lehman; AIG stock view cut

* Higher-than-expected July inflation hurts sentiment

* Dow, Nasdaq off 1 percent, S&P down 0.9 percent (Updates to afternoon, changes byline)

By Steven C. Johnson

NEW YORK, Aug 19 (Reuters) - U.S. stocks fell for a second straight day on Tuesday, shedding 1 percent, as credit worries hit bank shares and a report showing inflation remains a threat despite slower growth further fed investor anxiety.

Shares of financial companies were the biggest drag on the Dow and the S&P 500, with Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) down more than 3 percent each. The KBW index of bank stocks .BKX fell 3.2 percent.

Reminding investors that the effects of the housing slump are not over, JPMorgan Securities forecast that investment bank Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) will take a further $4 billion of write-downs in the third quarter stemming from losses on mortgage-related investments. [ID:nBNG259145]

Lehman shares were down 11 percent.

"The uncertainty with regard to financials has kept the downward pressure on," said Bucky Hellwig, senior vice president at Morgan Asset Management in Birmingham, Alabama.

"Home prices keep falling, assets continue to deteriorate, the economy continues to slow, which can only worsen the unemployment rate and increase delinquencies," he added. "There's seemingly no end to this cycle, and that's to the detriment of any financial stock."

The Dow Jones industrial average .DJI fell 130.35 points, or 1.14 percent, to 11,349.04, while the Standard & Poor's 500 Index .SPX declined 12.01 points, or 0.94 percent, to 1,266.59, after earlier falling more than 1 percent to a session low at 1,263.53. The Nasdaq Composite Index .IXIC shed 29.30 points, or 1.21 percent, to 2,387.68.

Shares of insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) shed 5.1 percent to $20.48 after Goldman Sachs cut its price target on the stock to $23 from $30, while Lehman Brothers lost 11.1 percent to $13.33 on negative forecast by JP Morgan Securities.

Bank of America's shares fell 3.4 percent to $28.32 and Wells Fargo shed 3.2 percent to $27.88.

Shares of home builders also slid after the Commerce Department said housing starts in July fell 11 percent, the lowest annual rate in more than 17 years.

Pulte Homes (PHM.N: Quote, Profile, Research, Stock Buzz) , the No. 3 U.S. home builder, declined 1.8 percent to $12.31. The Dow Jones index of home builders' shares .DJUSHB dropped nearly 3 percent.  Continued...