updated 5/21/2006 4:40:59 PM ET 2006-05-21T20:40:59

Wall Street stabilized at the end of a difficult week Friday, closing moderately higher as investors shook off some of their stress about interest rates. The market’s main indexes each fell about 2 percent this week.

Major Market Indices

The higher close came after an erratic session, a sign that investors are still unsettled about inflation in the absence of any new economic data. An upswing in consumer prices this week sparked fears that the Federal Reserve will keep hiking interest rates; the Dow Jones industrial average fell 291 points on Wednesday and Thursday.

Meanwhile, lower oil prices and further declines in bond yields brightened the market’s mood, as did a sharp recovery of the U.S. dollar against the Japanese yen. Dell Inc.’s plan to use Advanced Micro Devices Inc. chips in its computers propped up the tech sector.

But while Wall Street maintained its anxiety over the interest rates, stocks should soon see a significant bounce after several days of steep declines, said Ken McCarthy, chief economist for vFinance Investments.

“I think we are pretty overdone here,” McCarthy said of the market’s correction. “If you look at the fundamentals supposedly driving this [sell-off], they’re very minor. We have some nervousness here, but the underlying fundamentals are still very strong.”

The Dow Jones industrial average closed Friday with a gain of 15.77 points, or 0.14 percent, after dropping 514 points, or 4.4 percent, in the previous six trading days. The broader Standard & Poor’s 500-stock index gained 5.22 points, or 0.41 percent, Friday, while the Nasdaq composite index added 13.56 points, or 0.62 percent.

The market has been on edge since the Fed last week said soaring commodities prices posed a problem for inflation and could necessitate higher interest rates. Many on Wall Street attribute the recent correction in stocks to investors coming to terms with the fact that more rate hikes are possible.

Wednesday’s consumer price index report was clear evidence that interest rates could keep climbing and sent investors running for cover. For the week, the Dow lost 2.08 percent, the S&P 500 index slid 1.87 percent and the Nasdaq declined 2.22 percent.

Oil futures slid Friday , despite fears about overseas conflicts and a shortage of U.S. gasoline reserves in the summer driving season.

Recent weakness in the U.S. dollar has also stoked inflation worries since its falling value will require more of the currency to purchase foreign-made goods. But on Friday, the dollar regained ground on the Japanese yen, while gold prices plunged to $655 an ounce.

“You don’t see steel, cement or other basic materials prices going up. What you see is gold, copper and oil going up, and I think a big piece of this is pure speculation, not driven by economic fundamentals,” McCarthy said. “Because of that, I don’t think we have an inflation problem.”

Although stock traders were uneasy about this week’s inflation data, the bond market has been more upbeat about evidence of slowing economic growth. Bonds extended their gains from Thursday’s surge, with the yield on the 10-year Treasury note slipping to 5.05 percent from 5.06 percent late in the prior session.

Dell said it would begin offering AMD chips in some of its computers, a significant switch from its long-standing use of only Intel Corp. processors. Dell also posted an 18 percent drop in quarterly earnings. Dell rose 62 cents to $24.57 and AMD gained $3.60 to $34.95, while Intel slumped 29 cents to $18.36.

Apparel retailer Gap Inc. late Thursday said its profit slid 17 percent last quarter amid a deepening sales slump that the company said should end in the second half of the year. Gap rose 56 cents to $18.48.

Nasdaq Stock Market Inc. said it acquired another 2.2 million shares of London Stock Exchange PLC, increasing its stake in the LSE to 25.1 percent. Nasdaq added $1.08 to $33.05.

Asian markets fared better after this week’s inflation scare, with Japan’s Nikkei stock average rising 0.42 percent. Britain’s FTSE 100 lost 0.25 percent, Germany’s DAX index slid 0.11 percent and France’s CAC-40 was higher by 0.73 percent.

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