U.S. Stocks Recover From Steep Losses On Talk Of Ambac Bailout

NEW YORK (MarketWatch) -- U.S. stocks on Tuesday recovered from steep losses on speculation a bailout may be close for struggling bond insurer Ambac Financial Group, but credit jitters lingered after Federal Reserve Chairman Ben Bernanke forecast more home foreclosures.

"Everybody says 'Not to worry,' but the market trend is telling you 'You should be scared to death,'" said Ken Tower, chief market strategist at Covered Bridge Tactical.

Down more than 200 points earlier on, the Dow Jones Industrial Average was recently off 27.92 points at 12,230.98, with all but three of its 30 components lapsing in afternoon trades.

Blue-chip decliners were led by Citigroup Inc., down 4% after Merrill Lynch cut the bank's earnings estimates. .

Shares of Ambac Financial rallied 8.9% after the Financial Times reported a capital infusion of the bond insurer could be announced as early as Wednesday. .

"The Ambac deal that seemed so sure last week, I was expecting it to be slipped under the door like a hotel bill at any moment," said Tower.

Other stocks weighing on the Dow include Intel , down 0.2% after the chipmaker lowered its gross-margin outlook for the current quarter. .

Intel led declines in the technology sector, with tech giant Google Inc.'s stock falling below the $450 mark, recently off 2%, and business software titan Oracle Corp. falling 3.4%. .

The S&P 500 Index fell 1.19 points to 1,330.15 and the technology-heavy Nasdaq Composite Index shed losses to trade 5.23 points higher at 2,263.83.

The declines came as Fed chief Bernanke, speaking at a community banking forum in Orlando, Fla., said that he expects more home foreclosures as the subprime-lending crisis gets worse. .

"Bernanke did not bring any candy to the forum," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., offering what the analyst called "a set of weak proposals."

Fed actions to forestall the loss of homes "may help people in a bind, but also may serve to prolong the period of tight credit, and that's the crisis that is facing the market, that has been dogging the market for the past six to 12 months," he added.

In a separate speech, Federal Reserve Gov. Frederic Mishkin downplayed rising inflation, saying a potential recession is the greater concern. .

Financials fall further

Financial stocks fell on lingering fears over the troubled credit markets, with Jackson Hewitt Tax Service Inc. down 30% after reporting a 34% drop in fiscal third-quarter net earnings. .

Volume on the New York Stock Exchange neared 959 million and decliners outran advancing stocks 4 to 1. On the Nasdaq, 662 million shares traded hands, and declining stocks topped those advancing nearly 3 to 1.

In commodities trade on the New York Mercantile Exchange, crude futures fell $2.70 to $99.75 a barrel. . Gold futures fell 40 cents to $966.30 an ounce. . .

"The falling two-year Treasury yield is a sign of investor anxiety, and of just how tight credit really is," said Tower, noting 2-year note yields on Monday fell to a new low.

On Tuesday, the 2-year note was up 6/32 at 100.282, its yield at 1.547%.

Overseas, the Reserve Bank of Australia lifted its benchmark lending rate by a quarter-percentage point to 7.25%, while the Bank of Canada made a half-point rate cut.

The Canadian and Australian dollars both fell against the U.S. dollar after the divergent policy moves by their respective central banks. The dollar was weaker against most other rivals, with the dollar index at 73.59, compared with 73.730 in late U.S. trading Monday.

Active issues

Barr Pharmaceuticals Inc. rallied 9.4% after announcing Monday a federal court ruling in its favor invalidating a patent protecting Bayer AG's birth-control pill.

Shares of Staples Inc. fell 2.1% after the largest U.S. office-supplies chain reported a 1% drop in quarterly pofit and lowered its full-year forecast. .

In overseas trade, Asian markets were mixed, with Australian stocks extending losses. .

Stocks in Europe also dropped, with auto and tech shares taking the brunt of the selling. .

By Kate Gibson