NEW YORK (Reuters) - More signs of weakness in the mortgage market, another surge in oil prices and a Federal Reserve rate decision could create more turbulence for Wall Street this week.

Widening fallout from the US housing slump has rattled credit markets, putting investors on edge about the outlook for corporate takeovers and share buybacks two catalysts of the market's recent rally to record highs.

Last Friday, Standard & Poor's cut its ratings outlook on the debt of investment bank Bear Stearns Cos., fanning concern that troubles in the subprime mortgage market are spreading, which could threaten the economy's health.

The rating agency's move came as American Home Mortgage Investment Corp., a subprime mortgage lender, announced plans to close most of its operations, joining a growing list of casualties hit by the stalled housing market.

"The market is really struggling with defining the size of the subprime problem. The market does not like uncertainty," said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray, in Minneapolis.

Investors will tune in to what the Federal Reserve says in its assessment of the US economy's outlook tomorrow, when it releases its policy decision on interest rates.

The Federal Open Market Committee, the Fed's policy-setting body, is widely expected to keep rates unchanged, so investors will be focused on the central bank's assessment of risk, especially regarding troubles in the subprime market, and following the government's report Friday that showed job growth is slowing. The FOMC statement is expected at about 2:15 p.m.

The Fed has held the fed funds rate for overnight bank loans steady at 5.25 percent since June 2006.

The toll from housing is hurting the financial sector, with the S&P financial index now down 12.7 percent year to date, as investors fret about likely losses tied to rising delinquencies on subprime mortgages.

"There's more to come with the credit problems. You're going to get a ripple effect," said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm, in Toledo, Ohio.

"It's not just subprime. It affects a lot more anything from the economic numbers to investor psychology to the wealth effect as equity prices move down."

Last Friday, credit worries escalated after more news about Bear Stearns' exposure to the subprime mortgage market, which sparked a sharp sell-off in stocks.

By Friday's closing bell, the Standard & Poor's 500 index and the Nasdaq had suffered their worst one-day percentage losses since the February 27 rout in global markets, which was triggered by a steep drop in China's benchmark stock index.

Bear Stearns' chief financial officer said bond market woes that are driving investors away from risk may be a worse problem than the 1987 stock market crash.

The Dow Jones industrial average sank 281.42 points, or 2.09 percent, to end on Friday at 13,181.91. The Standard & Poor's 500 Index slid 39.14 points, or 2.66 percent, to 1,433.06. The Nasdaq Composite Index tumbled 64.73 points, or 2.51 percent, to 2,511.25.

For the week, the Dow fell 0.7 percent, the S&P 500 declined 1.8 percent and the Nasdaq lost 2 percent.

Yet for the year so far, all three major US stock indexes are still higher: The Dow is up 5.77 percent, the S&P 500 is up 1.04 percent and the Nasdaq is up 3.97 percent.

In one sign of just how skittish investors have become, Wall Street's so-called fear gauge, the Chicago Board Options Exchange's Volatility Index, or VIX, is at a four-year high. It has stayed above a reading of 20 for seven straight trading sessions, reflecting the market's nervousness.

"I absolutely think the volatility is here to stay," Fehrenbach said.

Andrew Wilkinson, senior market analyst at Interactive Brokers Group, in Greenwich, Connecticut, said of the past week's sell-off: "We are finishing off with signs that financing for these (merger) deals could fall apart, leaving bankers holding the bag."

While investors appear to have paid scant attention to earnings as the subprime troubles dominate the headlines, next week's roster of companies set to report quarterly results will include utilities like Duke Energy Corp., PG&E Corp. and Edison International.

Tech bellwether Cisco Systems Inc., the world's largest maker of routers and switches that direct Internet traffic, and American International Group Inc., the world's largest insurer, also will post earnings.