U.S. blue-chip stocks rose on Monday after reversing direction in the last hour of trade as the flight to safety into short-dated Treasury bills flagged, suggesting concerns over the stability of credit markets were receding.

U.S. three-month Treasury bill yields fell earlier in the session in their biggest one-day drop since the stock market crash of 1987 as investors pulled more money out of risky investments and sheltered it in one of the safest parts of the Treasury market. Later, yields rose as that flight to safety receded.

The Dow average was bolstered by shares of big manufacturers like Caterpillar Inc that may benefit from a cut in benchmark interest rates. The broad S&P 500 declined slightly, while the Nasdaq composite index finished a touch higher.

The U.S. Federal Reserve on Friday cut the discount rate it charges on bank loans in a bid to stabilize financial markets. The Fed's surprising move followed sharp declines in world stocks over the past month weeks as problems in the risky U.S. subprime mortgage sector spread to other markets.

There's a big split on Wall Street on whether we've seen the bottom or is this just a technical bounce, and that's why you're seeing a very mixed pattern in the market ... But the fear of a financial implosion is, I think, gradually fading into the backround, said Michael Metz, chief investment strategist at Oppenheimer & Co.

The Dow Jones industrial average rose 42.27 points, or 0.32 percent, to end at 13,121.35. The Standard & Poor's 500 Index edged down 0.39 of a point, or 0.03 percent, to finish at 1,445.55. But the Nasdaq Composite Index gained 3.56 points, or 0.14 percent, to close at 2,508.59.


After the close, news from Capital One Financial Corp. underscored problems in the credit market.

Shares of the credit card issuer and banking company fell 4.1 percent to $64 in extended trading after it said it would stop making new mortgages through brokers. It also cut its profit outlook.

During the regular session, Caterpillar gained 1.9 percent to $74.05, making it the top positive influence on the Dow. Shares of Honeywell International also gained, ending up 2.5 percent at $55.82, along with Alcoa Inc., up 3.1 percent at $34.32 on the New York Stock Exchange.

Lowe's Cos helped support the S&P 500 index. The home improvement retailer reported a higher-than-expected profit, sending its shares up 6.1 percent to $28.50.

Jay Finkel, Lord Abbett senior equity trader in Jersey City, New Jersey, said, Earlier when the market was down, the 3-month Treasury bill was rallying, which is a flight-to-quality situation.

Financial shares pared losses late in the day, after leading the charge lower for stocks around midday.

JP Morgan Chase & Co.down 1.1 percent at $46.49, and Citigroup Inc. down 0.9 percent at $48.39, were among the top drags on the S&P 500 index.

Thornburg Mortgage Chief Operating Officer Larry Goldstone said there was a crisis in investor confidence in the mortgage sector. Its stock fell 10.2 percent to $13.50.

In other financial news, Countrywide Financial Corp. fell 7.6 percent to $19.81 after the stock was downgraded by Keefe, Bruyette & Woods Inc..

Last week Countrywide, the largest U.S. mortgage lender, unexpectedly tapped an entire $11.5 billion credit line to help fund operations.

U.S. Treasury Secretary Henry Paulson is scheduled to meet with Federal Reserve Chairman Ben Bernanke and Senate Banking Committee Chairman Christopher Dodd on Tuesday to discuss the recent volatility in the financial markets, Dodd said.

Volume was moderate on the New York Stock Exchange, where about 1.54 billion shares changed hands, below last year's estimated daily average of 1.84 billion. On the Nasdaq, about 1.73 billion shares traded, below last year's daily average of 2.02 billion.

Advancers outnumbered decliners by a ratio of 2 to 1 on the NYSE and by about 16 to 15 on the Nasdaq.