NEW YORK — Stocks retreated in thin trading Monday as worries about the credit ratings of American International Group Inc. weighed on the financial sector. The Dow Jones industrial average fell about 125 points following a 200-point rally in Friday's session.

AIG was the steepest decliner among the 30 stocks that make up the Dow industrials after Fitch Ratings warned Friday that it might cut its ratings on the insurer. The stock fell $1, or 5 percent, to $18.87.

The financial sector has struggled as some homeowners have fallen behind on mortgage payments. A report Monday by a trade group for real estate agents showed that the number of unsold properties reached an all-time high in July. However, the National Association of Realtors' findings that sales of existing homes increased 3.1 percent in July was much stronger than Wall Street had expected.

The news arrived as volume remains light, with many traders taking time off in the last week of August. Sean Simko, head of fixed income management SEI Investments, said that the stock and bond markets are likely showing outsize reactions because of the low volume.

"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 late morning trading, the Dow Jones industrial average fell 133.44, or 1.17 percent, to 11,494.62. The Dow surged 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 Monday. The Standard & Poor's 500 index declined 15.34, or 1.20 percent, to 1,276.86, and the Nasdaq composite index fell 38.24, or 1.61 percent, to 2,376.47.

Among financial names declining, Merrill Lynch & Co. fell 42 cents to $24.80, while Bank of America Corp. slipped 67 cents to $29.54.

Bonds jumped Monday as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.79 percent from 3.87 percent late Friday. The dollar rose against other major currencies, while gold prices fell.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 248.9 million shares.

The Russell 2000 index of smaller companies fell 14.61, or 1.98 percent, to 722.99.

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 0.63 percent, and France's CAC-40 lost 1.09 percent.

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