Wall Street stocks were trading lower on Monday after a report said sales of existing homes in the US dropped for a fifth consecutive month in July.

Sales were down to their slowest pace in nearly five years while house prices have fallen in every month of the past year.

By mid-afternoon, the S&P 500 was down 0.6 per cent at 1,470.14 while the Nasdaq Composite had lost 0.5 per cent to 2,565.20. The Dow Jones Industrial Average fell 0.2 per cent to 13,350.99 and the Russell 2000 index of smaller companies was 1.1 per cent lower at 790.24.

The yield on the 10-year Treasury bond was 2 basis points lower at 4.59 per cent.

Equity volatility as measured by the Chicago Board Options Exchange's Vix index - which last week dropped more than 30 per cent - gained 7.8 per cent by mid-afternoon to 22.34.

The National Association of Realtors reported sales of previously owned homes in the US declined by 0.2 per cent in July, less than forecast, to an annual rate of 5.75m from 5.76m in June.

The median price of a house sold in July fell to $230,200, down by 0.6 per cent from last year. This marked the record 12th consecutive month that home prices have declined from a year before.

Ian Shepherdson, chief US economist at High Frequency Economics, said, given that context, "prices would be falling even if all was well in the mortgage market. So in today's troubled circumstances, we have to expect steep declines for the foreseeable future."

Noting there was also a sharp increase in housing inventory, Alan Ruskin, chief international strategist at RBS Greenwich Capital, said the report "in combination with credit problems is bound to put significant downward pressure on prices in coming months". But Mr Ruskin also cautioned: "We will probably have to await another couple of months to better survey the damage caused by the credit tremors."

Adding to the bearish sentiment, a survey of economists found most now think credit worries are more of an immediate threat to the US economy than terrorism. Some 32 per cent in the National Association of Business Economics study said loan defaults and excessive debt were their chief short-term concerns, while 20 per cent cited terrorism.

Countrywide, which has borne the brunt of concerns over the subprime mortgage crisis, lost 4.9 per cent to $19.98 after Lehman Brothers reduced its 2007 earnings per share estimate for the biggest mortgage lender in the US from $2.80 to $1.00. Lehman cited "extraordinary weakness" in the secondary market for loans held by Countrywide, whose shares have lost more than 50 per cent of their value since mid-May.

Shares in Home Depot gained 1.9 per cent to $35.33 after the retailer agreed to sell its wholesale distribution business to a group of private equity firms for $8.5bn, some $1.8bn less than originally planned.

Wal-Mart was weaker after a report by the Financial Times that the world's biggest retailer was considering making acquisitions in the US for the first time in more than 25 years. The company's shares were 0.2 per cent lower at $43.84.

Takeover news moved shares in several companies. US Steel fell 0.1 per cent to $93.33 after the company said it will buy Stelco of Canada for about $1.1bn.

Chicago Bridge & Iron stock gained 0.2 per cent to $38.24 after it agreed to buy Lummus Global from ABB, the Swiss-Swedish engineering group, for $950m.

Rio Tinto fell 0.6 per cent to $272.43 after it said it had won US antitrust approval for its $38.1bn purchase of Alcan, the Canadian aluminum producer, whose shares rose 0.3 per cent to $97.68.

Stock in First National Bancshares lost 2.6 per cent to $14.36 after it said it had agreed a $59.3m stock and cash deal to buy Carolina National, whose shares rose 41.5 per cent to $19.25.

Gateway had its biggest rise since its initial public offering in December 1993 after Acer of Taiwan said it would buy the company for $710m, creating the world's third biggest computer-maker. Its shares leaped 49.6 per cent to $1.81.

Safeway fell 2.6 per cent to $32.10 after Merrill Lynch downgraded the retailer to "sell" from "neutral".

Shares in Neurochem fell 36.5 per cent to $3.53 after the biotechnology company said its Alzheimer's drug had failed in a late-stage clinical trial.

Wall Street ended last week higher on Friday after relative calm returned to the markets following weeks of volatility prompted by fears of a credit crunch.

While concerns over the extent of the fall-out from the subprime mortgage crisis continued to weigh on investor sentiment, lower trading volumes and a wait-and-see stance on the Federal Reserve's interest rate policy resulted in a more typical August week of a directionless, drifting stock market.

The S&P 500 finished 2.3 per cent up on the week at 1,479.37, while the Nasdaq Composite was 2.8 per cent higher over the week at 2,576.69. The Dow Jones Industrial Average rose 2.3 per cent at 13,378.87 and the Russell 2000 index of smaller companies gained 1.6 per cent at 798.93.