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The Russell 2000 (NYSE: IWM) lost ground today following news of an unexpected downsizing in U.S. manufacturing in November. The small-cap index fell 12.48 points, or 1.63%, to 753.55. The Dow Jones Industrial Average (INDU) dropped 220.86 points, or 1.67%, to 13,043.96.

The first session of 2008 belonged to the bears following news that U.S. manufacturing unexpectedly shrank in December.

The Institute for Supply Management reported after that its manufacturing index fell to 47.7 in December, down from 50.8 in November and well below economists’ projections for a reading of 50.5. A level above 50 indicates an expansion.

The decline, which comes after 10 months of expansion, is due to a fall in new orders, production and exports. The data tell us that tighter lending conditions and the ongoing problems in the U.S. housing sector have taken their toll.

The numbers also renew fears that the slowing U.S. economy could tip into recession. Manufacturing comprises about 14% of gross domestic product.

Small-cap stocks started just above the flat line but dropped immediately after the report’s release at 10 a.m. ET.

Equities experience a short-lived bounce in the afternoon when the U.S. Federal Reserve released its minutes from the meeting on Dec. 11, when it decided to lower the target interest rate 0.25% to 4.25%.

The Russell 2000 (NYSE: IWM) futures are down and the small-cap index will probably open with a drop.

The bears are ready to go on news that an analyst with JPMorgan Chase & Co. (NYSE: JPM) downgraded Bear Stearns (NYSE: BSC), Goldman Sachs Group, Inc. (NYSE: GS) and Lehman Brothers Holdings Inc. (NYSE: LEH) to “sell” from “market perform.”

All three New York-based financial services companies have invested in securities backed by subprime mortgages and have been negatively affected by the slump in the U.S. housing sector.

Here are the biggest percentage gainers and losers in pre-market trading among companies with a market cap between $100 million and $750 million:

Biggest percentage gainers:

• America’s Car-Mart, Inc. (CRMT), up 17% on news it swung to a fiscal second-quarter profit.
• U.S Auto Parts Network (PRTS), up 5%.
• Cache Inc. (CACH), up 5%.

Biggest percentage losers:

• China GrenTech Corporation Ltd. (GRRF), down 7%.
• Paragon Shipping Inc. (PRGN) down 6%.
• Parallel Petroleum Corp. (PLLL) down 5% on news it has raised its credit facility to $200 million from $150 million.

Genesco Inc. (NYSE: GCO), HSW International, Inc. (Nasdaq: HSWI) and Hardinge Inc. (Nasdaq: HDNG) are among the biggest percentage losers in Monday's trading among companies with market capitalizations under $750 million.

Here are today's biggest percentage losers:

The Russell 2000 (NYSE: IWM) has declined steeply on news of poor corporate earnings and credit fears stemming from troubled U.S. housing sector.

At 11:04 a.m. ET, the small-cap index was down 18.05 points, or 2.35%, to 751.45. The Dow Jones Industrial Average (INDU) had lost 158.19 points, or 1.20%, to 13,018.60.

The bears came out in full force this morning following news before the start of trading that investment bank Goldman Sachs Group, Inc. (NYSE: GS) downgraded financial services giant Citigroup Inc. (NYSE: C) to “sell” from “neutral” on fears that it could suffer up to $15 billion in write-downs on collateralized debt obligations over the next two quarters.

The financial sector has been aching in the wake of the meltdown in the subprime mortgage sector, which began after the U.S. housing prices started to stagnate in the second quarter of 2006.

News of the expected write-downs came as an unpleasant reminder that so far no one has been able to quantify the extent of the damage to the financial sector, but various estimates are calling for total losses of hundreds of billions of dollars.

The fact that the largest U.S. bank has been dealt a blow and added to the list of casualties tells us that the subprime mess is still working its way through the system and has the potential to inflict more pain.

A number of mortgage lenders have already declared bankruptcy and many financial institutions have tightened credit.

The Russell 2000 (NYSE: IWM) fell for the third consecutive time today following news of a decline in industrial production and renewed fears of a credit squeeze. The Russell 2000 lost 2.10 points, or 0.27%, to 769.50. The Dow Jones Industrial Average (INDU) added 66.74 points, or 0.51%, to 13,176.79.

On a year-to-date basis, the Russell 2000 has retreated 2.28%, while the Dow has risen 5.63% and the S&P 500 has added 2.97%.

Industrial production unexpectedly fell 0.5% in October, the U.S. Federal Reserve reported before the opening. That’s the biggest decline since January, defying economists’ projections of a rise of 0.1%. Industrial production added 0.2% in September.

The decline was due primarily to a 1.6% drop in utilities, as well as smaller declines in mines, construction and consumer goods. Compared with October 2006, industrial production has increased 1.8%.

Capacity utilization for the total industry declined to 81.7% from 82.2% in September.

The data tell us that the U.S. economy is probably headed for a slowdown, as industrial production is about 20% of gross domestic product. On the plus side, factories have room to ramp up production without triggering inflation.

The Russell 2000 (NYSE: IWM) is plummeting on news of more fallout from the meltdown in the subprime mortgage sector.

At 10:22 a.m. ET, the small-cap index had lost 8.23 points, or 1.05%, to 772.67. The Dow Jones Industrial Average (INDU) was down 134.29 points, or 1.01%, to 13,132.

The bears are out in full force today following news before the opening that Wachovia Corp. (NYSE: WB) expects to suffer additional losses of $1.1 billion in the third quarter due to subprime mortgage-related debt. The Charlotte, N.C.-based bank, the fourth largest U.S. bank, said that it will write down collateralized debt obligations of about $1.11 per share for the month of October.

Wachovia also announced that it expects to see loan losses of over $500 million in parts of the country that have been most severely affected by the slump in the housing sector.

The news came as a nasty reminder that the subprime mess continues to ripple through the financial system.

In economic news, the U.S. Commerce Department reported that the trade deficit unexpectedly narrowed in September. The deficit came to $56.5 billion, the lowest level since May 2005 and a decline of 0.6% from $56.8 billion in August. A weak dollar and strong growth overseas helped exports grow more than imports.

The prices of U.S. exports rose 0.9% October from 0.3% in September, according to the Labor Department.