(Updates to mid-afternoon, changes byline)

* Dow enters bear market territory

* Record oil prices stir inflation, spending worry

* Moody’s may cut Morgan Stanley debt

By Cal Mankowski

NEW YORK, June 27 (Reuters) - Stocks fell sharply on Friday, as concerns about the impact of record oil prices on the economy and fears of more credit losses in the bank sector rattled investors.

The drop in the Dow had pushed it down in afternoon trading more than 20 percent below its October 2007 peak, a decline that Wall Street calls a bear market. The bear market designation is not considered official unless there is a market close at 20 percent below an index’s most recent closing high.

Selling gathered steam in afternoon trading after Moody's Investors Service said it may cut the credit ratings of Morgan Stanley MS.N.

Friday’s decline followed a rout on Thursday that had the Dow down 358 points.

“In this kind of a market, people are looking for any reason to sell,” said Chris Orndorff, managing principal and head of equity strategy at Payden & Rygel. “It’s the opposite of a bull market when people take small positives and run with it. Now people are taking small negatives and running for the hills.”

The Dow Jones industrial average .DJI tumbled 69.21 points, or 0.60 percent, to 11,384.21. The Standard & Poor's 500 Index .SPX dipped 1.08 points, or 0.08 percent, to 1,282.07. The Nasdaq Composite Index .IXIC lost 5.64 points, or 0.24 percent, to 2,315.73.

U.S. crude climbed to a record for a second straight day, jumping as high as $142.99 a barrel and adding to concerns about the toll of higher energy costs on consumers and the outlook for earnings.

Analysts gave more gloomy predictions about the outlook for banks, which have been reeling from the credit crisis. Lehman Brothers predicted rival Merrill Lynch MER.N would write down another $5.4 billion in the second quarter and slashed its price target for the stock. For details, see [ID:nBNG192536].

Merrill shares slipped 0.8 percent to $32.79 while Morgan Stanley shares were off 0.1 percent at $36.79.

Besides selling bank shares, investors also sold shares of companies whose fortunes are closely tied to economic cycles and are heavily energy reliant, including U.S. plane maker Boeing BA.N, which fell 1.8 percent to $66.94.

Technology was not spared, with BlackBerry maker Research In Motion Ltd RIMM.ORIM.TO falling 2.6 percent to $120.25.

Home builders' shares tumbled after KB Home KBH.N, the No. 5 U.S. home builder, posted a wider-than-expected quarterly loss. The stock fell 3.5 percent to $17.49 on the NYSE. (Additional reporting by Walker Simon and Ellis Mnyandu; Editing by Jan Paschal)