Brokers downgrade of the two biggest U.S. home-funding companies

"The big issue is, 'Where is the subprime problem going to pop up again?'" said Lincoln Anderson, chief investment officer at LPL Financial Services in Boston.

Brokers downgrade of the two biggest U.S. home-funding companies signaled the likelihood of further deterioration in credit markets, intensifying fears of a recession in the world's largest economy.Safe-haven U.S. government debt rose on the stock market's decline, and spurred by a fresh round of poor U.S. economic data, the dollar fell to a three-week low against the euro. Data showing growth in euro zone services also underpinned the strength of the single European currency.European shares fell as downbeat results from Germany's RWE (RWEG.DE: Quote, Profile, Research) hit utilities and as fears of a U.S. recession hurt banks. In Japan, shares also fell on fears of a U.S. recession and shares of exporters fell as the yen strengthened.Merrill Lynch recommended investors sell Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research), the largest U.S. home-funding companies, as they face more pain due to further deterioration in financial markets and weakening credit conditions.The downgrades were the latest dismal new for the U.S. financial sector, which is suffering from defaults in the subprime mortgage market and tightening credit markets.