"People remain very sensitive to the mortgage-backed securities situation and how all this leverage creates an uncertain environment," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.
Nervousness about subprime mortgages resurfaced last week after the near collapse of two hedge funds owned by Bear Stearns Cos. Inc. that were heavily invested in that business. On Monday, Bear Stearns fell 4%, fueling concerns about other brokers, such as Lehman Brothers and Goldman Sachs .
"So far, it still seems contained but until we get clarity about how it's going to unwind, the market is going to remain nervous."
The Dow Jones Industrial Average finished down 8 points at 13,352, as 21 of its 30 components retreated. The Dow earlier rallied by more than 120 points to a high of 13,488.
The Dow was supported by the likes of Altria Group Inc. and McDonalds Corp. , while Dupont , Citigroup Inc. and Alcoa Inc. weighed.
General Motors Corp. rose 2.3%, after the U.S. automaker was upgraded to buy from neutral at Goldman Sachs, which said it was making a "tactical trading call" that shares will rise on expectations for sizable concessions from GM's unionized workers.
The S&P 500 gained 4.8 points to 1,497, while the Nasdaq Composite lost 11.9 points to 2,577.
Concerns about the subprime mortgage market and hedge fund rates have some strategists remaining cautious about the market.
"Investors are beginning to look at the risks inside the markets and beginning to reprice various asset classes based upon the risks," said Paul Nolte, director of investments at Hinsdale Associates. "We expect many more large one-day moves in the weeks ahead, with a market that should soon begin to trend lower, if it has not yet."
On the broad market for equities, trading volumes showed 1.7 billion shares exchanging hands on the New York Stock Exchange, while 2.1 billion traded on the Nasdaq stock market. Rising issues topped decliners by 11 to 5 on the NYSE and by 19 to 10 on Nasdaq.
By sector, banks , transportation and utilities led the gains, while oil services , gold and real estate investment trusts were weak.
Yields and homes
The market, which has been pressured by rising bond yields over the past few weeks, saw some relief early Monday, as yields fell back. The benchmark 10-year Treasury bond finished up 13/32 at 95 18/32 in price, while its yield , which moves inversely, fell to 5.078%.
Higher yields provide a risk-free alternative to stocks while also lifting borrowing costs for consumers and businesses.
A report on May existing-home sales report, along with weakness in global markets overnight, helped lower bond yields on Monday. Sales fell 0.3% in May to a seasonally adjusted annual rate of 5.99 million from 6.01 million in April.
While sales were stronger than the 5.90 million pace expected by economists, the inventory of previously owned homes for sale rose to the highest level in 15 years, the National Association of Realtors reported Monday.
Shares of homebuilders fell, with the Philadelphia Housing Sector Index down 0.7%, led lower by Hovnanian , which reports earnings on Wednesday. Lennar Corp. , which reports Tuesday, and KB Home , which reports Thursday, also fell.
The housing data confirmed market expectations that the Federal Reserve, which meets on Wednesday and Thursday, will leave interest rates unchanged. Investors will still be eager to see if the committee's accompanying statement hints at whether rate increases or reductions could be in store in coming months.
Crude oil prices reversed early weaknesto gain 4 cents to $69.18 after news that a number of oil companies have reportedly refused Venezuela's terms on major oil projects. Crude rallied last week but turned lower early Monday as a strike in Nigeria ended.
Among oil stocks, BP Plc rose 0.3% even after news it has cut output by 10,000 barrels of oil a day at its Alaska Prudhoe Bay field a week ago following a small spill.
According to The Daily Telegraph, BP will incur a cost of $3.5 million as a result of the spill.
Subprime, hedge fund woes on backburner
Stocks took a heavy hit on Friday due to nervousness about a combination of rising Treasury yields, global interest rates and whether subprime lending woes have further to unwind. The Dow industrials dropped 185 points.
The equities market last week played off near collapses of two Bear Stearns Cos. hedge funds, among other factors.
"Equities are trying to adjust to higher yields," said Art Hogan, chief market strategist at Jefferies & Co.
Besides U.S. Treasury bonds, global bond yields have been driven higher by expectations of sturdy global growth and inflation pressures.
"The stock market is trying to learn whether this points to growth or inflation," Hogan said. "If it is being driven by growth, then it is not a negative thing for stocks."
However, the Bank for International Settlements is sounding a cautionary note, according to a report on the Web site of the U.K.'s Telegraph newspaper.
The BIS is warning that years of loose monetary policy have helped pump up a dangerous credit bubble, leaving the global economy more exposed to a slump than is generally understood.
Shares on the move
Dow Jones & Co. remained front and center on investors' radar screens.
According to The Wall Street Journal's online edition there were "intense" negotiations over protecting the editorial independence of the Journal. The newspaper cited people familiar with the matter. Dow Jones is the publisher of both The Wall Street Journal and of MarketWatch.
Dow Jones' stock was down 2% at $57.66, below the $60-a-share buyout price offered by News Corp.
and Rupert Murdoch.
Drugstore and personal-products chain Walgreen reported a 20% increase in profit, citing strong prescription drug sales.
The dollar was steady while the yen remained under pressure, although there is growing talk of a possibility that the Bank of Japan may lift rates in the near future.
August gold fell $2.30 to close at $654.70 an ounce.
By Nick Godt