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Worry over financials stifles stocks

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The Associated Press

Wall Street ended a whipsaw day mostly lower as fears of escalating instability in the financial sector kept investors on edge despite a steep retreat in oil. The Dow Jones industrials on Tuesday had their first close below 11,000 since July 2006.

Just days after the government said it would aid Fannie Mae and Freddie Mac if necessary, Federal Reserve Chairman Ben S. Bernanke told Congress the U.S. economy faced “numerous difficulties.” During the day’s testimony, Treasury Secretary Henry M. Paulson Jr. also said the Bush administration had no immediate plans to lend money to the mortgage financing giants or buy their stock.

Shares of Fannie and Freddie, which together hold or back nearly half of all the nation’s mortgages, fell again.

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The stock market did benefit from some bargain-hunting as oil retreated from its near-record levels. But the uncertainty of the financial sector made that recovery hard to sustain. If oil prices stabilize or retreat, consumers might feel more comfortable spending on discretionary items, and in turn help the economy.

“There’s definitely a correlation between high energy prices and low consumer spending, and we need that to abate to get us a break,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group.

A barrel of light, sweet crude dropped $6.44 to settle at $138.74 on the New York Mercantile Exchange as traders bet that the weak economy in the United States and elsewhere would take its toll on global demand.

While some of the market’s most battered bank stocks -- including Washington Mutual, Lehman Bros. Holdings and regional bank First Horizon National -- finished higher Tuesday, most bank stocks gave up their brief rallies by the end of the session.

The Dow fell 92.65 points, or 0.8%, to 10,962.54. It was the blue chips’ lowest close since July 21, 2006; the high price of oil is one of the major reasons the Dow has been trading at nearly two-year lows.

Broader stock indicators ended mixed. The Standard & Poor’s 500 index fell 13.39 points, or 1.1%, to 1,214.91, while the Nasdaq composite index rose 2.84 points, or 0.1%, to 2,215.71.

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The technology-dominated Nasdaq got a lift from Microsoft, which rose $1, or 4%, to $26.15 after an Oppenheimer & Co. analyst said the software company’s shares “look attractive” ahead of its quarterly results scheduled for Thursday.

Intel also rose ahead of its earnings, which were released after the market closed and showed a 25% profit increase that beat analysts’ expectations. After advancing 24 cents to $20.71 in regular trading, Intel shares rose an additional 29 cents to $21 after hours.

Treasury prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.82% from 3.86% late Monday. Gold prices rose $5 to $977.70. The dollar was mixed against other currencies. It gained 0.004 on the euro, which fell to $1.588.

Among the stronger stocks of the day were Lehman, which rose 82 cents, or 6.6%, to $13.22; WaMu, which rose 38 cents, or 11.8%, to $3.61; and First Horizon, which rose 85 cents, or 16.9%, to $5.89. First Horizon named a new chief executive Tuesday.

But Fannie Mae fell $2.66, or 27%, to $7.07, and Freddie Mac fell $1.85, or 26%, to $5.26. Were the government to back the two institutions financially, Paulson said, it would be done “under terms and conditions that protect the U.S. taxpayer.”

Another big decliner was American International Group, which suffered the worst percentage drop among stocks in the Dow and hit a 52-week low. AIG shares fell $1.91, or 8.5%, to $20.64 after a Wachovia analyst lowered his rating and earnings estimate for the beleaguered insurer.

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Citigroup, another Dow stock, traded as low as $14.01 Tuesday before closing down 66 cents, or 4.3%, at $14.56. Citigroup has not traded that low since the company was formed in the October 1998 merger of Citicorp and Travelers Group.

General Motors saw the largest rebound among the 30 Dow stocks after announcing plans to lay off salaried workers, reduce truck production, suspend its dividend and borrow $2 billion to $3 billion as it adjusts to a weakening U.S. market. GM shares rose 46 cents, or 4.9%, to $9.84.

In economic data, the Labor Department said core inflation at the wholesale level, which excludes energy and food, ticked up by just 0.2% but that overall wholesale prices jumped by a larger-than-expected 1.8% -- the biggest gain since November.

U.S. consumers have been monitoring their budgets more carefully in the face of higher energy prices, falling home values and an uncertain jobs climate. The Commerce Department reported Tuesday that retail sales edged up 0.1% in June, a weaker amount than expected, because of plummeting sales at car dealerships.

“The bottom line is, eventually, oil as a commodity is going to react to the overall economy,” said Dan Alpert, managing director at the investment bank Westwood Capital.

The Russell 2000 index of smaller companies fell 2.15 points, or 0.3%, to 662.35.

Overseas, Japan’s Nikkei stock average fell 2%, Britain’s FTSE 100 fell 2.4%, Germany’s DAX index fell 1.9% and France’s CAC-40 fell 2%.

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