updated 8/23/2006 7:37:43 AM ET 2006-08-23T11:37:43

A Federal Reserve official’s warning about a possible resumption of interest rate hikes unnerved Wall Street Tuesday, wiping out an early advance and leaving stocks narrowly higher by the close.

Major Market Indices

The comments by Chicago Fed President Michael Moskow rattled investors looking to revive last week’s rally after they collected profits on Monday. Retailers, along with other sectors dependent on consumer spending, were among the stocks causing the major indexes to wobble Tuesday.

The Fed left interest rates unchanged earlier this month after raising them 17 straight times. Wall Street has rallied since then on hopes this would be the end, but one analyst said Moskow’s comments could be “putting out a trial balloon” to gauge the market’s reaction to a continuation of rate hikes.

“The market has discounted the likelihood of another rate increase by about a 20 percent chance for the next meeting” in September, said Scott Merritt, a U.S. equity strategist for JPMorgan Asset Management. “He might want to get that up to 50 percent to get more flexibility. If expectations get too high or low, (Fed Chairman Ben) Bernanke can’t really go against it or he’ll lose credibility.”

According to preliminary calculations, the Dow Jones industrial average dipped 4.89, or 0.04 percent, to 11,340.16 after been up more than 38 points early in the session. Advancers beat decliners on the New York Stock Exchange and the Nasdaq Stock Market.

Broader stock indicators edged higher. The Standard & Poor’s 500 index rose 1.30, or 0.10 percent, to 1,298.82, and the Nasdaq composite index gained 2.27, or 0.11 percent, to 2,150.02.

Bonds held their ground, with the yield on the benchmark 10-year Treasury note flat at 4.82 percent from 4.84 percent on Monday. The dollar gained against other major currencies, while gold prices edged lower.

The market rose earlier after Iran’s top nuclear negotiator committed to “serious negotiations,” raising hopes that Middle East tensions might ease. Iran has sent an official response to a European Union-led offer of incentives to persuade it to halt uranium enrichment activities.

Iran is the world’s fourth-largest producer of crude, and controls one of the biggest stockpiles of reserves. Investors were encouraged as oil prices held steady after Monday’s gains, with a barrel of light, sweet crude quoted at $72.55, up 10 cents, on the New York Mercantile Exchange.

Before Moskow talked the market down, investors were also getting behind technology stocks after analysts upgraded two stocks — Advanced Micro Devices Inc. and XM Satellite Radio Holdings Inc. The Nasdaq continued to hang on to those gains.

An AMD executive told news services the company hopes to capture 40 percent of the global market for computer processors by 2009. Advanced Micro held on to a gain of 1.50, or 6.4 percent, to $24.90. Meanwhile, rival Intel fell 13 cents, or 0.7 percent, to $18.12.

XM Satellite Radio shares spiked $1.71, or 15 percent, to $12.95 after its upgrade. An analyst for Bear Stearns said the depressed stock will soon be buoyed by positive news, such as expected regulatory approval for one of its radios in time for the holiday season.

Investors also were encouraged that Toll Brother Inc.’s full-year guidance was not a worst case scenario amid a U.S. housing slump. The luxury homebuilder posted a 19 percent drop in third-quarter profit, but that still surpassed projections and lifted the stock.

Toll Brothers added 80 cents, or 3.2 percent, to $25.57. Rival Pulte Homes Inc., the nation’s largest homebuilder, picked up 44 cents, or 1.5 percent, to $29.41. D.R. Horton Inc. shares rose 11 cents to $21.57, and Hovnanian Enterprises Inc. increased 19 cents to $26.62.

Advancing issues still outnumbered decliners 4 to 3 basis on the New York Stock Exchange, where volume came to 601.07 million shares, up from Monday’s 587.73 million.

The Russell 2000 index of smaller companies rose 3.38, or 0.48 percent, to 708.71.

Overseas, Japan’s Nikkei stock average closed up 1.33 percent. In afternoon trading, Britain’s FTSE 100 dropped 0.21 percent, Germany’s DAX index rose 0.41 percent, and France’s CAC-40 added 0.46 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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