By Jui Chakravorty

DETROIT (Reuters) - General Motors Corp <GM.N> on Monday said it was offering zero-percent financing to clear out 2007 inventory as fears of a weaker auto market and GM's own exposure to the subprime mortgage meltdown precipitated a drop in its stock.

The "Red Tag" sale, which started November 15 and ends January 2, includes no-interest loans for five years on all 2007 models of Chevrolet, Pontiac, Buick, GMC and Saturn, excluding the Chevrolet Corvette and the C-4500 series Chevrolet and GMC trucks, GM spokesman John McDonald said.

It also offers dealership incentives on the 2008 models, which would allow dealers to offer their own price reductions, creating special vehicle pricing.

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"There seems to be an implicit outlook for weaker car sales in this new incentive program," Burnham Securities analyst David Healy said.

GM shares fell more than 7 percent, representing the largest percentage decline on the Dow Jones industrial average.

"GM is down ... amid concerns about the ongoing problems in the credit markets, rising energy costs, and the risk that the fallout from the housing slump is now spilling over into consumer spending and auto sales," Frederic Ruffy, an analyst at options education firm Optionetics in California, said.

U.S. vehicle sales in 2007 are expected to fall to the lowest level since 1998, and industry experts are anticipating a tougher year in 2008.

Thomas Stallkamp, a former president at Chrysler and a partner with private equity firm Ripplewood Holdings, said at the Reuters Autos Summit on Sunday that U.S. sales could dip to 14.5 million units in 2008, which would be the lowest tally in 15 years.

Jerry York, an adviser to billionaire investor Kirk Kerkorian, also said at the summit that U.S. light vehicle sales could slip to 15.5 million units or less next year.

Ruffy cited those comments as another possible reason for the drop in GM shares, which were down $2.03, or 6.9 percent, at $27.25 in afternoon trading on the New York Stock Exchange.

Healy said the downgrade of Citigroup Inc <C.N> by Goldman Sachs Group <GS.N> on Monday has also led to an overall chilling of the market and may have been another reason for the drop in GM shares.

"That might indicate to some people the subprime housing loan problems are not over," Healy said.

Analysts have been concerned about GM's exposure to the subprime market through its former finance arm GMAC, in which it retains a 49-percent stake. GMAC's residential mortgage unit, ResCap, lost $2.26 billion in the third quarter.

GM's U.S. sales have slipped 6 percent this year as the automaker has struggled with tough competition, high gas prices and a weak housing market that has crimped consumer confidence.

GM reported a record $39 billion quarterly loss earlier this month, primarily reflecting a tax accounting change. Its shares have fallen nearly 20 percent since then.

GM, which used to be known for massive discounting, has been trying to stick to a strategy of clearer pricing and lower incentives in a bid to increase profitability and boost the resale value of its vehicles.

But in October, GM spent an average of $3,118 a vehicle, up from $2,575 a year earlier, according to Edmunds.com.

(Additional reporting by Doris Frankel and Ben Klayman, editing by Maureen Bavdek)