Shares of major homebuilders declined more sharply than the broader market Tuesday after an analyst warned that a legal dispute clouds Lennar's ( LEN) prospects, while KB Homes' ( KB) outlook will likely continue to be hurt by falling home prices.

Citi Investment Research analyst Josh Levin cut his price target for Los Angeles-based KB Home to $15 from $16 a share and wrote in a research note that the controversy involving Lennar presents "a risk that investors cannot properly analyze."

Miami-based Lennar last week said it was suing a corporate watchdog group that recently accused the homebuilder of fraud. Lennar claimed the allegations by the San Diego-based Fraud Discovery Institute were false, and were prompted by the group's ties with a developer being sued by Lennar.

The Fraud Discovery Institute's top official, Barry Minkow, issued a report citing the top 10 flags for fraud at Lennar, including a claim that the builder's joint ventures were operated as Ponzi schemes. The report sent Lennar's stock price tumbling by 20%.

Levin said in a research note that the allegations against Lennar "still strike us as less than credible. However, we have the distinct sense that Minkow will continue to pursue the matter and make more noise in the coming weeks either on his own or through the media."

Shares of Lennar fell $1.07, or 13.6%, to $6.78 at the close.

In cutting his price target for KB, Levin wrote that KB "is ahead of schedule with regards to its strategy of shifting its product mix" by constructing smaller, more cost-efficient homes. The shift has helped improve the company's profit margin recently, Levin said.

But he said KB "will face some challenges maintaining these margins over the next several quarters as we expect home prices to continue to fall."

Shares of KB fell $1.12, or about 8.7%, to close at $11.79.

Major stock indices were down 2% to 3% in the afternoon amid fear that the global banking crisis is worsening, which sent financial stocks plunging Tuesday, and may also have dragged housing stocks. Centex ( CTX) fell 88 cents, or about 8%, to $10.01; Pulte Homes ( PHM) fell 74 cents, or 6.6%, to $10.41; and Toll Brothers ( TOL) fell $1.42, or about 7.4%, to $17.69.
Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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