U.S. Stocks Retreat From Lows As Lehman's Future Debated

NEW YORK (MarketWatch) -- U.S. stocks on Friday posted modest losses after a two-day winning streak, withr an unexpected drop in retail sales and high anxiety over the fate of investment bank Lehman Brothers Holdings Inc. weighing on investors' sentiment.

"The U.S. economy is weak and likely getting weaker," said Kevin Giddis, managing director, Morgan Keegan & Co. "There seems to be no end to the shoes that keep dropping around the financial-services companies -- obviously we are dealing with an octopus -- and we just aren't sure who is next."

The major indexes shaved their steep losses and flirted briefly in positive territory as the financial sector wavered back lower after a stint in the green.

Shares of Zions Bancorporation were a standout, charging 9.5% higher. Zions on Thursday said it sold 7.2 million shares for $250 million.

After dropping more than 150 points, the Dow Jones Industrial Average was more recently off 34.44 points at 11,399.27, with 15 of its 30 components posting losses, led by insurance giant American International Group Inc. , down 22.7%.

AIG is among the companies thought to be holding mortgage-backed debt that has plagued the financial-services industry for more than a year, said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

Blue-chip retailers also felt pressure. Shares of Wal-Mart Stores Inc. traded off 1.9%. .

General Motors Corp. proved the blue chips' largest gainer, with shares of the automaker rising 5.9%.

The S&P 500 fell 1.09 points to 1,247.96, with consumer discretionary, financials and health care fronting the declines.

Energy, materials and utilities led gains among S&P's 10 industry groups.

The Nasdaq Composite declined 2.27 points to 2,255.95.

Volume on the New York Stock Exchange neared 542 million, with declining issues and those advancing running nearly even. On the Nasdaq, 366 million shares exchanged hands, and decliners topped advancers about 7 to 6.

Financial follies

The market in large part remains fixated on Lehman , as well as potential buyers of the embattled brokerage's assets. Bank of America Corp. is Lehman's "best hope," according to an article in the Wall Street Journal.

Lehman shares fell 9.7%.

Meanwhile, shares of Washington Mutual Inc. were up 3.5%, gaining after the nation's largest thrift said late Thursday that it's well capitalized and that its provision for loan losses will drop to about $4.5 billion from $5.9 billion in the second quarter.

Goldman Sachs upgraded Washington Mutual to neutral from sell, saying the lender's capital is absorbing pain. Moody's Investors Service, however, cut its credit rating to below investment grade.

Stock indexes had pared their losses after a reported rise in U.S. consumer sentiment in September. The University of Michigan/Reuters index in September climbed to 73.1, its highest level so far this year.

Ahead of Wall Street's start, the Commerce Department reported a 0.3% decline in August retail sales, worse than the 0.4% increase that expected by economists. .

Separately, the Labor Department said U.S. producer prices fell 0.9% in August, pushed lower in large part by declining energy costs. Core PPI prices, which exclude food and energy, gained 0.2% last month.

Gold rush

Treasury prices shed initial gains, with two-year note yields lately off one basis point at 2.21%. .

The dollar index , which tracks the greenback against a trade-weighted basket of currencies, fell 0.8% to stand at 79.15. .

The dollar's reversal from its recent rally encouraged investors to buy gold after nine consecutive sessions of declines for the precious metal, with the benchmark gold contract lately up $11.9 at $757.40 an ounce.

The greenback's weakness and worries that Hurricane Ike might disrupt energy production in the Gulf of Mexico propelled the price of crudeoil higher, with the contract for October delivery up 38 cents to $101.25 a barrel. .

In overseas trading, European shares snapped a three-session losing streak, with the pan-European Dow Jones Stoxx 600 index gaining 1.7%. .

Russian equities rebounded after three sessions of steep losses, with oil and metal stocks leading the gains. .

Overnight, Asian equities closed out the week on a mostly positive note. Japan's Nikkei 225 Average moved up 0.9%. .

On Thursday, U.S. equities closed solidly higher after a manic day that began with sharp losses on speculation Lehman might not survive.

By Kate Gibson