NEW YORK (Bloomberg) — US stocks slid, sending the Standard & Poor's 500 Index to a 12-year low, as the government cut shareholders' stake in Citigroup Inc. by 74 percent and the economy shrank at a faster pace than previously estimated.

Citigroup plunged 39 percent after the Treasury agreed to convert as much as $25 billion of preferred shares into common stock in a third rescue attempt. Bank of America Corp. tumbled 26 percent, snapping a four-day rally in an S&P 500 group of banks. Alcoa Inc. and Boeing Co. fell more than 3.8 percent after the Commerce Department said gross domestic product contracted at a 6.2 percent annual pace in the fourth quarter.

"The Citi story is a nightmare that keeps getting worse, with no end in sight," said Matthew Kaufler, money manager at Federated Clover Investment Advisors, which oversees $2.1 billion. "The fact that it's occurring on a day when we're getting horrible GDP numbers adds some kerosene to the mix."

The S&P 500 lost 2.4 percent to 735.09, its lowest close since December 1996. The Dow Jones Industrial Average fell 119.15 points, or 1.7 percent, to 7,062.93, leaving it 50 percent below its 2007 record and at its lowest level since May 1997. The Russell 2000 Index slipped ONE percent.

The S&P 500 slid 4.5 percent over the past five days, its third straight weekly decline, as companies from JPMorgan Chase & Co. to Textron Inc. cut dividends to shore up capital and President Barack Obama proposed reducing payments to health-care companies. The index fell 11 percent in February amid concern Obama's stimulus package won't stem the deepening recession.

Losses were limited yesterday as investors snapped up shares after the S&P 500's valuation slid to a 23-year low.

Citigroup sank 96 cents to $1.50, an 18-year low. The Treasury Department said it will swap its preferred shares for common stock only if private holders agree to the same terms. The US doesn't immediately intend to inject additional money after channelling $45 billion to the New York-based company last year.

More than 1.8 billion shares of Citigroup changed hands yesterday, setting a record for trading volume for a US stock, according to the New York Stock Exchange. Citigroup accounted for about 13 percent of total trading volume of 14 billion shares, which was 46 percent more than the three-month daily average of stocks traded on all US exchanges. Bank of America, which also got $45 billion from the government, dropped $1.37 to $3.95. Wells Fargo & Co., recipient of $25 billion in US funds, slumped 16 percent to $12.10. The companies are among more than 400 financial institutions that received cash in exchange for preferred shares from the government.

"The fear is that this will happen to all the preferreds that the government has given to the banks," said Tom Wirth, senior investment officer at Chemung Canal Trust Co., which manages $1.5 billion in Elmira, New York. "In one word, it's dilution."

The US government has pledged more than $11.6 trillion in the past 19 months on behalf of American taxpayers to bail out banks and stimulate economic growth, according to data compiled by Bloomberg as of February 24.

It hasn't been enough to stop banks from collapsing. Regulators seized 14 lenders this year, including eight this month. Last year, regulators shuttered 25 banks, including Washington Mutual Inc., the biggest bank failure in US history.

The 10 percent decline in the S&P 500 Banks Index yesterday halted a four-day advance, 30 percent advance in the measure that was spurred by decreased concern that banks would be nationalised and a request for additional bailout funds for the industry in Obama's first budget proposal.

Financial companies may fall to seven percent of the S&P 500 before losses in bank stocks end, extending a drop that already cut the weighting in half, say analysts including Mary Ann Bartels of Bank of America and John Roque of Natixis Bleichroeder Inc., who base predictions on price charts.

Citigroup, which had a market value of $277 billion at the end of 2006, has tumbled 97 percent since then, leaving it valued at $8.2 billion.

General Electric Co. retreated 6.5 percent to $8.51. The company, whose finance unit has been battered by rising loan losses, cut its annual dividend for the first time since at least 1940 as chief executive officer Jeffrey Immelt moves to preserve cash and protect the company's top AAA credit rating. The quarterly payout was lowered to 10 cents a share from 31 cents.

MetLife Inc. fell the most since October, tumbling 23 percent to $18.46. S&P downgraded the biggest US life insurer and nine other companies in the industry on the prospect of further investment losses. A measure of insurers in the US stock benchmark sank 7.9 percent.