updated 5/23/2006 8:23:20 AM ET 2006-05-23T12:23:20

Wall Street waffled but showed some signs of stability Monday, posting a moderate decline after falling sharply early in the session in response to sinking commodities prices. The Nasdaq composite index was hit hard as technology stocks fell out of favor with risk-averse investors, but it also finished above its lows for the day.

Major Market Indices

After dropping along with markets in other countries, U.S. stocks managed a modest comeback including a brief foray into positive territory by the Dow Jones industrials shortly before the close. But with the outlook for inflation and interest rates still unclear, traders were nervous about buying stocks affected by the sliding price of gold and other metals, as well as riskier investments such as tech issues. And so it wasn’t certain whether stocks could continue to steady themselves when trading resumed Tuesday.

The retreat in commodities overshadowed a rebound in bonds and a recovering U.S. dollar. “This is essentially a classic tug of war between real assets and financial assets,” said Jack Ablin, chief investment officer of Harris Private Bank.

Stocks built on losses that began May 10 amid fears that inflation will bring higher interest rates; the decline has sent the Dow tumbling more than 4 percent since then. While the market has been hoping for lower oil and gold prices to help ease inflation, analysts say overly optimistic investors had bid stocks higher earlier this spring and now aren’t ready to start buying again.

“What needs to happen is investors need to start discerning what’s risky and what’s not,” Ablin said. “Right now, they’re just busy selling without any regard for quality.”

The Dow fell 18.73, or 0.17 percent, to 11,125.33, after tumbling as much as 103 points earlier. The Dow briefly turned higher late in the day as investors bought up large-cap stocks, which have lagged the broader market so far this year.

Broader stock indicators also recouped some earlier losses. The Standard & Poor’s 500 index lost 4.96, or 0.39 percent, to 1,262.07; the Nasdaq dropped 21.02, or 0.96 percent, to 2,172.86, a sign of Wall Street’s diminishing faith in the volatile tech sector.

Crude futures bounced back after hitting a six-week low at midday, although traders were still worried that persistent high prices were eroding demand. A barrel of light crude gained 70 cents to settle at $69.23 on the New York Mercantile Exchange.

Elsewhere, the U.S. dollar was little changed against the Japanese yen and European currencies. Gold prices lingered near $655 per ounce after losing about $70 in last week’s plunge.

The drop in commodities prices and fear of rising interest rates left stocks in emerging markets down for the 10th straight session, led by a steep pullback on India’s exchanges. Tata Motors Ltd., India’s top truck maker, sank $1.99 to $16.21 in NYSE trading.

In other overseas markets, Japan’s Nikkei stock average plunged 1.84 percent; Britain’s FTSE 100 dropped 2.2 percent, Germany’s DAX index slid 2.22 percent and France’s CAC-40 was lower by 2.65 percent.

Monday’s selloff reflected Wall Street’s continued anxiety over the prospect of more interest rate hikes from the Federal Reserve. Investors, hopeful that the Fed was near the end of its rate tightening, catapulted stocks to multiyear highs earlier this month, but recent indications that inflation remains an issue and that higher rates could be coming sent the market racing downward.

“When the Fed raises rates at this stage, they do it because they want to slow down the economy,” said Ed Peters, chief investment officer at PanAgora Asset Management. “There aren’t any real signs that the economy is actually slowing down.”

But while stock traders have reworked their expectations for interest rates, the bond market has been more optimistic in recent weeks, lifting Treasury notes from a four-year low. “I think bond investors are siding with the Fed — there’s this unwavering faith that the Fed will be able to raise short-term rates and contain any inflation,” Ablin said.

The yield on the 10-year Treasury note dipped below 5 percent for the first time in a month before the bond market’s rally fizzled in afternoon trading. The 10-year yield slipped to 5.04 percent from 5.05 percent late Friday.

Tech stocks waned as Wall Street fretted about a slowdown in technology growth in the coming quarters. Intel Corp., which last month reduced its spending budget, slid 35 cents to $18.01; Dell Inc. has also warned of slowing computer sales, and its shares fell 19 cents to $24.38.

The pullback in metal prices weighed on the sector and left aluminum producer Alcoa Inc. as the biggest loser among the Dow industrials. Alcoa dropped 83 cents to $31.15.

NYSE made a $10.2 billion bid for Euronext NV, offering to swap each NYSE Group shares for 0.98 share of Euronext and $27.22 in cash. The deal trumps a rival $82-per-share bid from Deutsche Boerse last week. NYSE Group Inc. fell $1.65 to $62.85.

Wal-Mart Stores Inc. is selling its South Korean unit to Shinsegae, Korea’s biggest discount retailer, for $882 million. Wal-Mart added 3 cents at $47.35.

Home improvement retailer Lowe’s Cos. said higher sales helped its profit swell 44 percent last quarter to easily beat Wall Street estimates. Lowe’s nonetheless fell $2.82 to $59.82.

Declining issues led advancers by about 11 to 5 on the NYSE, where preliminary consolidated volume of 2.99 billion shares lagged the 3.11 billion shares that changed hands Friday.

The Russell 2000 index of smaller companies slid 7.29, or 1.01 percent, to 715.25.

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