updated 2/20/2007 9:14:06 AM ET 2007-02-20T14:14:06

Wall Street finished Friday narrowly mixed, as a plunge in new housing starts and a sales warning from Microsoft Corp. prompted light selling ahead of a holiday weekend. The Dow Jones industrial average managed a slim gain, closing at a new record high.

Major Market Indices

Investors remained cautious after economic data released before the market opened showed a bigger-than-expected drop in the construction of new homes . Meanwhile, wholesale prices fell in January by the largest amount in three months amid retreating energy prices.

Technology stocks were weaker after Microsoft Chief Executive Steve Ballmer said late Thursday that Wall Street’s revenue forecasts for the Vista operating system are “overly aggressive.” The stock, trading just off its 52-week high, fell more than 2 percent.

(MSNBC.com is a Microsoft-NBC Universal joint venture.)

The decline on Wall Street halts a three-day advance that sent the Dow Jones industrial average up more than 200 points. The February rally has been driven by growing confidence that interest rates will hold steady as Federal Reserve Chairman Ben Bernanke battles inflation and tries to ease the economy into a soft landing.

“The Microsoft news and the housing data spooked the market,” said Jim Herrick, director of equity trading at Baird & Co. “But, this is just a mild drop, not a dramatic sell-off, and I wouldn’t be surprised if we see some type of rally toward the afternoon.”

The Dow Jones industrial average closed Friday up 2.56 points, or 0.02 percent, while the broader Standard & Poor’s 500 index was down 1.27 points, or 0.09 percent, and the Nasdaq composite index dropped 0.79 point, or 0.03 percent.

Friday’s advance gave the Dow its fourth straight gain. It marked the Dow’s 30th record close since the start of October and the blue chips’ third record close of the week. The major indexes had their best week since mid-November.

The markets will be closed Monday for Presidents Day.

The Labor Department reported its measure of wholesale inflation, the producer price index, declined 0.6 percent in January to match Wall Street expectations. Excluding food and energy, the core PPI was also in line with projections with a 0.2 percent increase.

However, the markets were startled by a report from the Commerce Department that construction of new homes and apartments sank 14.3 percent in January. This reflects the biggest drop in nearly 10 years.

“Weakness in housing starts will ultimately be good for housing because there is too much inventory out there. But this correction doesn’t make it painless,” said Stuart Schweitzer, global markets strategist for JPMorgan Private Bank.

He contends that while the slowdown in housing could lead to a rise in unemployment in the construction sector, the overall economy remains solid. A cooling housing sector and an attendant uptick in unemployment could ease concerns about inflation and help the Fed justify an eventual reduction in short-term interest rates. The central bank left rates unchanged at its last five meetings, interrupting a string of 17 straight advances that began in 2004.

“The economic outlook remains sound basically because with inflation under control interest rates can come down if needed and put a safety net under the economy,” Schweitzer said.

Homebuilders slumped on news of the weak housing starts. Lennar Corp. fell 24 cents to $52.96, while KB Home slid 53 cents to $54.22.

Microsoft fell 72 cents, or 2.4 percent, to $28.74 after Ballmer told Wall Street analysts they need to lower sales projections for Vista. The consumer version of Vista was released in late January, while businesses received their version in November.

AMR Corp., the parent of American Airlines, rose 92 cents to $38.97 on speculation a buyout team led by Goldman Sachs Group Inc. and British Airways PLC might make a bid for the company.

Compass Bancshares Inc. surged after Spanish financial group Banco Bilbao Vizcaya Argentaria SA agreed to buy the regional bank for $9.6 billion in cash and stock. Banco Bilbao shares fell 66 cents, or 2.5 percent, to $25.57; Compass surged $4.33, or 6.5 percent, to $70.70.

Goodyear Tire & Rubber Co. fell 23 cents to $25.18 after it reported a $358 million loss, and operating earnings that missed Wall Street projections. The company blamed the miss on a costly strike at 16 plants.

Overseas, Japan’s Nikkei stock average closed lower by 0.12 percent. Britain’s FTSE 100 closed down 0.21 percent, Germany’s DAX index fell 0.02 percent and France’s CAC-40 finished down 0.13 percent.

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