NEW YORK (AP) - Stocks sank in thin trading yesterday as worries about American International Group Inc. touched off broader concerns that financial companies will face more trouble to come.

The major indexes lost about two percent. The Dow Jones industrial average fell by nearly 250 points, erasing a gain of about 200 points seen on Friday. Bond prices also jumped as investors fled to the safety of government debt.

New York-based 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 on 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 financials have struggled in part because of a spike in the number of homeowners who have fallen behind on their mortgage payments. A report on Monday by a trade group for real estate agents showed the number of unsold properties rose to an all-time high in July. On the other hand, the report by the National Association of Realtors' said sales of existing homes increased 3.1 percent, a better-than-expected result.

The news arrived as volume remained light, with many traders on vacation for the last week of August. Sean Simko, head of fixed income management SEI Investments, said 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.

According to preliminary calculations, the Dow industrials fell 241.81, or 2.08 percent, to 11,386.25. The Dow surged nearly 200 points on 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.

Broader stock indicators also fell yesterday. The Standard & Poor's 500 index declined 25.36, or 1.96 percent, to 1,266.84, and the Nasdaq composite index fell 49.12, or 2.03 percent, to 2,365.59.

The Russell 2000 index of smaller companies fell 17.06, or 2.31 percent, to 720.54.

Bonds jumped yesterday as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.78 percent from 3.87 percent late on Friday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude rose 52 cents to settle at $115.11 per barrel on the New York Mercantile Exchange after Tropical Storm Gustav formed in the Caribbean.

Investors focused yesterday on troubles in the financial sector. AIG fell $1.09, or 5.5 percent, to $18.78; the stock at times fell to levels not seen since the fall of 1995.

Lehman Brothers Holdings Inc. fell 96 cents, or 6.7 percent, to $13.45 amid speculation about the future of its chief executive and the independence of the nation's fourth-largest investment bank. The stock surged Friday following reports that an investment fund controlled by the Korean government was considering some level of investment in the company. But South Korea's financial regulator warned that the Korean Development Bank should be cautious about any attempts to acquire an overseas bank, according to media reports.

Other financial stocks fell after federal regulators on Friday closed Columbian Bank and Trust Co. in Kansas, which had been hit by losses on soured real estate loans. It marked the ninth failure this year of a federally insured bank.

Among financial names declining, JPMorgan Chase & Co. fell $1.54, or 4.1 percent, to $36.13 - the bank revealed yesterday that its $1.2 billion in preferred stock in Fannie Mae and Freddie Mac has lost $600 million in value so far during the third quarter.

However, the two government-chartered mortgage giants regained some ground yesterday. Freddie Mac rose 48 cents, or 17 percent, to $3.29 after a successful debt offering yesterday. Fannie Mae rose 19 cents, or 3.8 percent, to $5.19. Bond insurer MBIA Inc. rose 63 cents, or 6.2 percent, to $10.83.

"We're in a very nervous market," said Alfred Goldman, chief market strategist at Wachovia Securities. He does not expect Wall Street will carve out a direction until trading volumes increase.

"The whole week is going to be a do-nothing week," he predicted, referring to the volume. "I expect to see the market backing and filling."

More broadly, Mr. Goldman does not believe Wall Street will see a sustained advance until investors get a sense that well-documented troubles like those of the financial sector are on the mend.

"The market doesn't dance with the same partner forever. It's all a matter of investors starting to look beyond the valley of all the problems to better times ahead."

Declining issues outnumbered advancers by nearly four-to-one on the New York Stock Exchange, where volume came to an anemic 865.2 million shares compared with 888.6 million on Friday.

Overseas, Japan's Nikkei stock average rose 1.68 percent. Britain's stock market was closed for a holiday, but Germany's DAX index fell 0.72 percent, and France's CAC-40 lost 1.01 percent.