Early in the session, stocks soared following strong earnings from General Motors Corp. and Sun Microsystems Inc. and amid somewhat mixed economic data. But the market pulled back after American Home Mortgage Investment Corp. said Tuesday it hasn't been able to tap into its credit lines and has hired advisers to consider its options, including the sale of its assets.
Wall Street has been concerned about lenders after some loans made to borrowers with poor credit have gone bad, and that anxiety contributed to the market's big plunge last week. Tuesday's trading showed how vulnerable the market remains, and how any advance can quickly evaporate.
"Anything that argues for higher (interest) rates and worsening credit conditions will be something that takes the air out of the market," said Denis Amato, chief investment officer at Ancora Advisors. He said the market's short-lived advance was in part made possible by a temporary easing of credit fears.
The Dow fell 146.32, or 1.10 percent, to 13,211.99 after being up as much as 140 points during the session. The move lower undid a nearly 93 point gain the blue chips saw Monday in a partial rebound from the 585 points they lost over the course of Thursday and Friday.
Broader stock indicators fell. The Standard & Poor's 500 index declined 18.64, or 1.26 percent, to 1,455.27, and the Nasdaq composite index fell 37.01, or 1.43 percent, to 2,546.27.
Bond prices, which move opposite yields, rose as investors quickly fled stocks. The 10-year Treasury note's yield fell to 4.75 percent from 4.81 percent late Monday.
Oil prices closed above $78 a barrel for the first time Tuesday on the New York Mercantile Exchange, advancing $1.38 to $78.21.
The dollar was mixed against other major currencies. Gold prices closed higher on the New York Mercantile Exchange.
"Everyone is walking on pins and needles and with the gains that were behind everybody I think they're a little more susceptible to the bad news," Amato said, referring to the tenuous nature of the session's early rally.
The initial gains came after a mixed batch of economic reports. The Commerce Department's year-over-year core personal consumption expenditures - a closely watched inflation measure - rose 1.9 percent in June, within the Federal Reserve's comfort zone. The report also showed that personal spending last month inched up 0.1 percent, its slowest pace in nine months.
And while a report from the Conference Board indicated that consumer confidence jumped to a six-year high, June construction spending dipped and the July Chicago purchasing manager's index indicated weaker-than-expected growth. The report is considered a precursor to the Institute for Supply Management's national manufacturing index, which is due Wednesday.
The market had received a boost from better-than-expected earnings from automaker GM and Sun Microsystems, which makes networking equipment. The stock market's gains Monday and decline Tuesday follow last week's sharp pullback, which was fueled by persistent worries that a deteriorating lending environment will make it harder for companies to borrow money.
As the market's about-face Tuesday shows, investors should expect continued volatility, one observer noted.
"The bottom line is volatility has picked up, and it's going to continue to pick up," said Jeff Schappe, chief investment officer at BB&T Asset Management, adding that there is potential for the market to drop another 5 percent. Last week, the Dow Jones industrial average tumbled about 5 percent from its record close of 14,000.41, reached earlier in July.
"I think investors need to not focus on the day-to-day volatility in the market, and look at the longer term," Schappe said. He noted that while credit jitters will likely keep riling the market for a while, the long-term view looks positive.
In corporate news, American Home fell $9.43, or 90 percent, to $1.04 following disclosure of its difficulties.
Adding to unease over American Home, Moody's Investors Service said it is raising its assumptions for losses on pools of Alt-A loans, which are above supbrime but below prime loans in terms of credit quality. The move could stir concerns that credit problems are spreading beyond subprime loans to a higher quality of borrower.
GM fell 21 cents to $32.40. The stock had been up much of the session after releasing its better-than-expected quarterly earnings, but followed the rest of the market lower. The company said it benefited from higher sales in markets worldwide.
Sun Microsystems jumped 21 cents, or 4.3 percent, to $5.10.
Though core inflation - which strips out volatile food and energy prices - has been registering at fairly mild levels, many investors are still concerned that energy prices will keep crimping consumer spending.
Investors also remain worried about credit getting tighter due to the faltering housing market. On Tuesday, a housing index released by Standard & Poor's showed that U.S. home prices fell for a fifth consecutive month in May by the steepest drop in about 16 years.
However, merger and acquisition activity hasn't appeared to be damped yet by tougher lending standards.
Billionaire investor Nelson Peltz's Triarc Cos. said he is willing to offer $37 to $41 a share to buy Wendy's International Inc., while The Wall Street Journal reported that its parent company, Dow Jones & Co., and Rupert Murdoch's News Corp. are close to a deal. The Bancroft family, controlling shareholders of Dow Jones, agreed to vote in favor of News Corp's bid, the newspaper reported.
Wendy's rose $1.34, or 4 percent, to $35.03.
Dow Jones shares rose $5.82, or 11.3 percent, to $57.38, while News Corp. fell 18 cents to $22.66.
Declining issues outnumbered advancers by about 9 to 7 on the New York Stock Exchange, where consolidated volume came to 4.18 billion shares compared with 4.04 billion traded Monday.
The Russell 2000 index of smaller companies fell 8.11, or 1.03 percent, to 776.12.
In Asian trading, Japan's Nikkei stock average fell 0.23 percent, Hong Kong's Hang Seng index jumped 1.96 percent, and China's Shanghai Composite Index rose 0.7 percent to a new record.
In European trading, Britain's FTSE 100 rose 2.48 percent, Germany's DAX index advanced 1.71 percent, and France's CAC-40 rose 1.85 percent.
By MADLEN READ AP Business Writer
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