Citi downgrades Discover Financial Services

American Express Co. tumbled as much as 12 percent after Citigroup Inc. recommended dumping shares of the credit-card company because of regulatory restrictions and mounting credit losses.

Citigroup started coverage of American Express with a "sell" recommendation today and put "hold" ratings on card companies Capital One Financial Corp. and Discover Financial Services. Donald Fandetti, who wrote the report, expects the stocks to drop and analysts to reduce their earnings estimates.

"What started out as weakness in hard-hit housing markets such as FL and CA has now morphed into a national credit problem for the card companies," Fandetti wrote, referring to Florida and California. "The response will be to raise rates and pull back credit."

American Express last month won federal approval to become a bank and is raising capital through sales of bonds and certificates of deposit as frozen credit markets force the company to turn elsewhere for cash. While the new measures provide some access to financing, the company "may need to seek longer-term funding solutions," Citigroup said. The Federal Reserve may publish restrictive new industry rules next week, Fandetti said.

American Express slumped $1.73, or 7.4 percent, to $21.56 at 4:09 p.m. on the New York Stock Exchange after dropping as low as $20.46. The New York-based company's shares have tumbled 59 percent this year.

Capital One, based in McLean, Virginia, fell 80 cents, or 2.4 percent, to $32.08 and Riverwoods-based Discover slid 17 cents to $10.18.

Bank of America Corp. analyst Suzanne Schiavelli also initiated coverage of American Express with a "sell" and placed a "neutral" recommendation on Discover.