Construction spending took its biggest nosedive in 14 years and manufacturing activity contracted, fresh trouble signs for a struggling economy.

The Commerce Department reported Monday that construction spending plunged by 1.7 percent in January. Builders slashed spending on residential projects, but the weakness spread beyond that ailing sector. There were cutbacks in spending on, among other things, hotels and motels, highways and various projects by state and local governments.

Another report showed fallout from housing and credit problems cutting deeper into manufacturing. The Institute for Supply Management 's manufacturing index clocked in at 48.3 in February. That was the weakest reading in nearly five years. A reading above 50 indicates expansion. Anything below that shows contraction. Still, the reading was a bit better than the 48.1 that economists were forecasting.

On Wall Street, stocks were down in morning trading. The latest showing on construction activity was worse than economists were expecting. They were forecasting a smaller decline of around 0.8 percent.

The 1.7 percent plunge in total construction spending came after a 1.3 percent decline in December. It was the largest drop since January 1994, when construction spending plummeted by 3.6 percent.

The one-two punch of the housing and credit crises is threatening to push the country into a recession or possibly has done so already.

Harder-to-get credit has thwarted some would-be home buyers and record-high foreclosures are adding to the glut of unsold homes. That's aggravating the housing industry's woes.

Spreading problems are slowing other sectors of the economy and causing employers to restrain hiring.

To bolster the economy, the Federal Reserve has been cutting a key interest rate since September. It recently turned more forceful, slashing rates by an aggressive 1.25 percentage points over the span of just eight days in January. Fed Chairman Ben Bernanke has signaled another reduction when the Fed meets next on March 18.

The economy's troubles are making people and businesses more cautious in their spending and investing, thus weakening the economy.

Soaring energy prices also are hurting the economy. Oil prices marched to a new record — past $103 a barrel. Those lofty prices are spreading inflation and crimping consumer spending.

Home sales and home prices continued to trend down in January, according to figures released this morning.

Sales of existing homes in January fell 0.4% compared to December and were off 23.4% below the pace in January 2007.

The National Association of Realtors said that a seasonably adjusted annual rate of 4.89 million units were sold in January, compared to the 4.91 million sold in December and the 6.44 million sold in January 2007.

The national median existing home price fell by 4.6% to $210,100 from last January.

Total housing inventory rose 5.5% at the end of January to 4.19 million existing homes for sale, or a 10.3-month supply at the current sales pace.

The national realtors group said that as limits for FHA loans increase that should stimulate sales growth later this year.

The Bush administration, trying to deal with a worsening housing slump, announced a new initiative Tuesday aimed at helping homeowners about to lose their homes. For qualified homeowners, it will put the foreclosure process on hold for 30 days.

Dubbed "Project Lifeline," the new program will be available to people who have taken out all types of mortgages, not just the high-cost subprime loans that have been the focus on previous relief efforts.

The program was put together by six of the nation's largest financial institutions, which service almost 50 percent of the nation's mortgages.

These lenders say they will contact homeowners who are 90 or more days overdue on their monthly mortgage payments. They will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders try to work out a way to make the mortgage more affordable to the homeowner.

"Project Lifeline is a valuable response, literally a lifeline, for people on the brink of the final steps in foreclosure," Housing and Urban Development Secretary Alphonso Jackson, said at a joint news conference with Treasury Secretary Henry Paulson.

He said the goal was to provide a temporary pause in the foreclosure process "long enough to find a way out" by allowing homeowners and lenders to negotiate a more affordable mortgage.

Paulson said that the new effort was just one of a number of approaches the administration was pursuing with the mortgage industry to deal with the country's worst housing slump in more than two decades.

In December, President Bush announced a deal brokered with the mortgage industry that will freeze certain subprime loans, those offered to borrowers with weak credit histories, for five years if the borrowers are unable to afford the higher monthly payments as those mortgages reset after being at lower introductory rates.

"As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures," Paulson said. "However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process."

Lenders will begin sending letters to homeowners who might qualify for the new program in coming days. Homeowners won't qualify for the program if they have entered bankruptcy or if they already have a foreclosure date within 30 days or if the home loan was taken out to cover an investment property or a vacation home.

The Mortgage Bankers Association reported that at least 1.3 million home mortgage loans were either seriously delinquent or in foreclosure at the end of the July-September quarter.

Private economists are forecasting that the number of foreclosures could soar to 1 million this year and next, about double the 2007 rate.

Officials did not have an estimate of how many people might be helped by the new "Project Lifeline" program.

Democratic critics said the administration was still not doing enough to help with a serious crisis which has slowed the overall economy to a near standstill and raised worries about a full-blown recession.

In a statement, Sen. Hillary Rodham Clinton, who is running for the Democratic presidential nomination, said that last year she had called for a 90-day moratorium on subprime foreclosures. She said the administration has been slow to react to the unfolding crisis.

"The administration's latest initiative is welcome news, but more remains to be done," she said in a statement.

In recent years, as subprime lending proliferated, a small law firm played a big role on Wall Street.

The young firm, McKee Nelson, helped investment banks and mortgage lenders bundle home loans into securities — lots of them. Since 2000, McKee has been involved in almost 3,300 deals totaling $2.7 trillion, according to Asset Backed Alert, an industry newsletter.

The Wall Street banks and lenders hired McKee Nelson, which is based in Washington and New York, to write or review prospectuses for the securities. It was a lucrative arrangement, helping to generate $202.5 million for the firm in 2006, the latest year for which figures are available.

Now, with losses on bad mortgage investments exceeding $135 billion, questions are growing about whether prospectuses like these adequately disclosed the risks to investors.

Mark H. Adelson, a co-founder of Adelson & Jacob Consulting, a securitization and real estate consulting firm, said offering documents in general lacked clear warnings about the deteriorating quality of home loans. “That’s what was missing,” Mr. Adelson said. Most of these documents, however, did detail the mechanics of the investments and the kinds of loans backing the securities, he said.

Reed D. Auerbach, a structured finance partner at McKee Nelson, stands by the firm’s work.

“We get paid to write good disclosure,” Mr. Auerbach said. “We think that the offering documents we’ve written disclosed all the risks to investors.”

New York state prosecutors are investigating whether Wall Street banks withheld crucial information from investors about the risks posed by subprime loans. McKee Nelson has not been subpoenaed in the investigation or accused of any wrongdoing.

But as investors’ losses mount, companies across the financial services industry are coming under scrutiny. Bankers, auditors and lawyers are bracing for a wave of lawsuits. One law firm, Cadwalader Wickersham & Taft, is already fighting a $70 million malpractice suit over its mortgage securities work.

“Anybody who touched the security in the process of creating or selling it is going to be subject to litigation,” said Joseph A. Grundfest, a business and law professor at Stanford and a former commissioner of the Securities and Exchange Commission.

The Internal Revenue Service, meantime, recently opened an inquiry into the special trusts that are typically used to issue mortgage securities. A McKee Nelson spokeswoman declined to comment.

McKee Nelson burst onto the scene in 1999 and quickly grabbed lucrative Wall Street work from long-established rivals. William F. Nelson, one of its co-founders, said the firm, which is known for its sophisticated tax work, did not employ any special legal maneuvers to outflank its competitors. “There’s no secret, magic elixir that we sprinkled,” Mr. Nelson said.

In any case, the mortgage turmoil is now hitting the highly regarded McKee Nelson hard. The firm recently pared its structured finance department to 80 lawyers from about 115 through buyouts, sabbaticals and transfers to other departments. More cuts are unlikely, a spokeswoman said.

Across Wall Street, the structured finance industry is hurting. Just this week Merrill Lynch, which has lost billions of dollars on mortgage investments, said it would pull back from the business.

But after profiting from the mortgage boom, McKee Nelson is now positioning itself to profit from the bust by riding the coming wave of lawsuits. In January, the firm flew its partners and their spouses to Charleston, S.C., aboard four Delta commuter jets, to map out its strategy.

“We’re heavily committed to doing more litigation,” Mr. Nelson said. The firm hopes to represent investment banks, hedge funds and other financial companies, as well as their executives, in a variety of litigation, he said.

Three of Canada's largest banks are among the defendants named in a lawsuit against troubled American mortgage lender Countrywide Financial Corp., one of the casualties of the subprime mortgage meltdown.

Subsidiaries of the Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia are listed among defendants in a class-action filed yesterday by New York City Pension Funds and comptrollers for the city and state.

The New York authorities are suing a total of 26 banks and two accounting firms that did business with Countrywide Financial Corp., saying the companies failed to ensure that the beleaguered mortgage company was being honest with investors.

The firms were added as defendants yesterday in a class-action lawsuit already pending against Countrywide in California.

Two of the lead plaintiffs, New York State comptroller Thomas DiNapoli and City comptroller William Thompson Jr., oversee several huge government pension funds that invested in Countrywide securities.

"Countrywide's underwriters had a duty to investigate whether Countrywide was acting honestly," DiNapoli said. "Investors lost millions, and New Yorkers lost their homes. We can't sit idly by."

Thompson and DiNapoli said they had also filed new complaints against several Countrywide officers and directors who hadn't been named as defendants in the previous court action.

California-based Countrywide rose to become the largest U.S. mortgage lender but has been struggling amid rising mortgage defaults, particularly subprime loans to borrowers with questionable credit histories.

The expanded list of defendants includes: RBC Capital Markets Corp., RBC Dominion Securities Inc. and RBC Dain Rauscher Inc. – all part of the Royal Bank group – as well as Scotia Capital Inc. and TD Securities Inc.

Other defendants include some of the biggest names in the investment banking business, such as: ABN Amro; Barclays; Citigroup; Deutsche Bank; Goldman, Sachs; HSBC; J.P. Morgan; Lehman Brothers; and Morgan Stanley.

Accounting firms Grant Thornton and KPMG are also named as defendants.

Banc of America Securities LLC, another defendant, is a subsidiary of Bank of America Corp., which has announced it plans to buy Countrywide.

After posting a $1.2 billion (U.S.) loss in the quarter ended Sept. 30 – its first quarterly loss in 25 years – Countrywide said it would post a profit for 2007's final three months and through this year.

But most analysts expect Countrywide to post a fourth-quarter loss, and will be watching closely next Tuesday when the troubled mortgage lender reports its 2007 year-end results.

Two people who say they were defrauded out of their homes will have a second chance to argue their cases before the Nebraska Supreme Court next week.

The state's high court already agreed in 2005 that 11 of the 13 individuals or couples who sued Mid-America Financial Investment Corp. had been defrauded by Mid-America's Scott Bloemer and Elena Hollingshead.

All of the plaintiffs said they thought they were signing loan papers with Omaha-based Mid-America to prevent foreclosure on their homes, but in reality, they were signing over their homes to Mid-America and agreeing to become tenants.

The plaintiffs said they were told they were signing loan documents. Some said Hollingshead and Bloemer rushed them through the process shortly before foreclosure.

The state Supreme Court ordered additional proceedings for William Street's and David Welton's claims because their cases differed slightly from the other plaintiffs. The court will hear arguments in the cases on Tuesday morning.

In Street's case, a prior bankruptcy court ruling complicated matters. Mid-America argues that Street's bankruptcy case should prevent him from suing Mid-America for damages, but the courts have sided with Street thus far.

In Welton's case, the Douglas County District Court originally ruled that he hadn't proven any damages, but the state Supreme Court disagreed and ordered the lower court to calculate how much Mid-America owed Welton.

Street and Welton each won damages of about $35,000 and attorneys fees of about $12,000 when their cases were reheard by a Douglas County judge.

Mid-America appealed to argue that neither Street nor Welton were owed anything, but even if Street and Welton are entitle to damages, Mid-America's lawyer David Domina argues the amount should be lower.

Foreclosure filings for November surged 68% from a year ago but dropped 10% from October, another sign that foreclosure activity overall may have peaked for the year, a foreclosure-listing service said.

RealtyTrac Inc. Chief Executive James J. Saccacio said that November's 10% drop from October was the first double-digit monthly decrease observed since April 2006.

The sequential decline "could indicate that foreclosure activity has topped out for the year, but the true test of whether this ceiling will hold will come at the beginning of next year -- when we anticipate that a seasonal surge in foreclosure filings and another possible wave of resetting mortgages could place further pressure on the housing market," Mr. Saccacio said.

According to RealtyTrac, based in Irvine, Calif., a total of 201,950 foreclosure filings -- default notices, auction sale notices and bank repossessions -- were reported during November. The national foreclosure rate for the month was one foreclosure filing for every 617 households.

Nevada had the nation's top state foreclosure rate for the 11th straight month, chalking up one foreclosure filing for every 152 households -- more than four times the national average. Trailing Nevada were Florida, with one foreclosure filing for every 282 households, and Ohio with one filing for every 307 households. Rounding out the top five were Colorado and California.

California led all states in foreclosure totals, with 39,992. Behind California were Florida, Ohio, Texas and Michigan.

California cities accounted for five of the nation's top metro foreclosure rates in November, one fewer than in the previous month. Stockton took the top spot, with one foreclosure filing for every 99 households -- more than six times the national average. Modesto took the No. 2 spot, with one foreclosure filing for every 104 households. Merced took No. 3, with one foreclosure filing for every 106 households. Other California cities in the top 10 were Vallejo-Fairfield at No. 6 and Riverside-San Bernardino at No. 9. Las Vegas was fourth, Detroit fifth.

Last month, RealtyTrac provided statistics showing foreclosure filings for October zoomed 94% from a year ago but rose 2% from September. Mr. Saccacio said then the modest sequential rise suggested that foreclosure activity in general had "leveled off" since peaking in August at 243,947 filings.