Stocks fall on worries about financial sector

The market found only slight solace in retreating oil prices.

San Francisco Federal Reserve President Janet Yellen said in a speech the financial markets remained fragile, and that it will take time for conditions to improve. "My expectation is that market functioning will improve markedly by 2009," she said. "But things could get worse before they get better."

The comments added to concerns raised in a note by Lehman Brothers analysts that Fannie and Freddie may need to raise more capital as the credit crisis continues. Worries about the ailing financial sector deflated a stock rally early in the day that had been fueled by a $4-a-barrel pullback in oil prices.

The market managed, however, to rebound from its lows of the day, when the Dow Jones industrial average sank to its worst level since mid-August of 2006. Some investors bought back into the market to take advantage of the low prices.

"The market is so skittish and so scared that half the people believe that this is just another leg of the down market and the other half believes that we're forming a bottom," said Frank Ingarra, assistant portfolio manager at Hennessy Funds.

The Dow fell 56.58, or 0.50 percent, to 11,231.96. Over the course of the day, the blue chips rallied, tumbled, rebounded, and then fell once more. The Dow fell as much as 167.80 to 11,120.74--its lowest trading level since Aug. 15, 2006--but was also up more than 100 in early trading.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 10.59, or 0.84 percent, to 1,252.31, and the Nasdaq composite index fell 2.06, or 0.09 percent, to 2,243.32.

The technology-dominated Nasdaq got a modest boost from Yahoo Inc., which rose $2.56, or 12 percent, to $23.91 after Microsoft Corp. expressed support for investor Carl Icahn's effort to oust Yahoo's board next month. Microsoft said a successful rebellion would encourage it to renew its takeover bid for Yahoo, or negotiate another deal.

Light, sweet crude fell $3.92 to close at $141.37 a barrel on the New York Mercantile Exchange, after falling by more than $5 a barrel at times.