updated 5/24/2006 9:26:03 AM ET 2006-05-24T13:26:03

Wall Street closed Tuesday moderately lower after worries about the impact of high oil prices on the economy triggered a late-day drop, erasing an earlier moderate advance.

Major Market Indices

Upbeat earnings from homebuilder Toll Brothers Inc. and a rebound in oil and gold prices had lifted stocks through most of the session following their recent heavy losses. But an afternoon news report that quoted Energy Secretary Sam Bodman as saying soaring energy prices could damage economic growth ignited traders’ inflation concerns and set off renewed selling.

Stocks had shown signs of stabilizing after suffering nearly two weeks of declines as the market fretted about the prospect of rising interest rates. The Dow Jones industrial average has tumbled almost 5 percent from a six-year high of 11,642.65, reached May 10.

There was no new economic data to help investors assess the interest rate outlook after recent signs of inflation supported the possibility of more rate increases from the Federal Reserve. Although Fed Chairman Ben Bernanke spoke to a congressional panel Tuesday , his testimony on personal finance steered clear of the central bank’s monetary policy.

The Dow Jones industrial average was down 26.98 points, or 0.24 percent, at the close. Broader stock indicators also shed earlier gains. The Standard & Poor’s 500-stock index finished down 5.50 points, or 0.44 percent, while the Nasdaq Composite index slid 14.09 points, or 0.65 percent.

Bonds pulled back slightly from their recent run-up, with the yield on the 10-year Treasury note rising to 5.06 percent from 5.04 percent late Monday. The U.S. dollar was flat against other major currencies, and gold prices gained ground to stand near $670 an ounce.

The recuperating bond market and stabilizing dollar have been bright spots for Wall Street during stocks’ recent retreat, which pulled the Dow and the S&P 500 down about 5 percent. Investors have been fixated on whether the Fed will keep boosting interest rates, but one or two more increases at this point would have a marginal impact, according to George Schwartz, president and chief investment officer of Schwartz Investment Council Inc.

“The Fed game is near the end — there may be a 17th or 18th increase, but there’s not going to be 27,” Schwartz added. “I think the 5 percent correction that the Dow and S&P 500 made is over. I think we’re going to head back up over the next several weeks.”

Wall Street’s late-day turnaround shows how vulnerable it is to investors’ intense anxiety about inflation and rate hikes.

Although Japan’s Nikkei stock average plunged 1.63 percent, European markets rebounded sharply and contributed to Wall Street’s earlier gains. Britain’s FTSE 100 gained 2.64 percent, Germany’s DAX index jumped 2.38 percent and France’s CAC-40 was higher by 2.45 percent.

Oil prices soared to almost $72 again after forecasts for an active hurricane season ignited worries about another round of devastation of Gulf Coast refineries.

The bounce in commodities initially had aluminum producer Alcoa Inc. and oil company Exxon Mobil Corp. leading the Dow industrials higher, but the late-day decline eroded their gains. Alcoa fell 31 cents to $30.84, and Exxon sank 39 cents to $60.39.

NYSE Group Inc. fell $2.80 to $60.05 although shareholders of European stock exchange operator Euronext NV declined a proposal to commit to a takeover by Deutsche Boerse Group . On Monday, NYSE’s $10.2 billion bid for Euronext trails Deutsche Boerse’s $11 billion deal.

Toll Brothers posted better-than-expected earnings for last quarter, but the homebuilder said higher material and labor costs would cause its 2006 profit to be less than previously estimated. Toll Brothers nonetheless rose 45 cents to $27.35.

Federal regulators are slapping Fannie Mae with a fine of between $300 million and $500 million for alleged accounting improprieties following a three-year investigation of the mortgage lender. Fannie Mae added 45 cents to $50.72.

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