U.S. stocks were lower on Thursday and the Dow was on track to snap an eight-day rally, but hopes for a possible resolution in Egypt to the political unrest that has gripped the country for more than two weeks helped equities pare earlier losses.

Stocks started the session lower after tech bellwether Cisco Systems Inc gave a weak outlook and reported eroding margins, stoking fears about falling public sector spending and increasing competition.

Cisco shares stock tumbled more than 13 percent to $19.09 on volume that was about four times its three-month daily average volume. It was the top percentage decliner on both the Dow and the Nasdaq 100 <.NDX>.

The shares could suffer even more if government spending continues to be weak, said James Russell, managing director of the Washington, D.C.-based Collingwood Group.

Cisco is a large government contractor, and if spending there goes the stock is going to drop pretty heavy, Russell said. We've seen tech spending rise elsewhere and it's difficult to digest the fact that we're not seeing it at Cisco.

Equities came off earlier lows as Egyptian President Hosni Mubarak looked likely to step down. The more than two weeks of civilian unrest in the country have pressured U.S. equities on fears that political instability could spread in the Middle East and North Africa and its possible impact on commodities.

The fact that he might be leaving early is good, it's a concession to the protesters that will hopefully be stabilizing, said Alec Young, equity strategist at S&P Equity Research in New York. But there can't be a power vacuum. You'd rather have Mubarak than lawless chaos.

The Dow Jones industrial average <.DJI> was down 39.40 points, or 0.32 percent, at 12,200.49. The Standard & Poor's 500 Index <.SPX> was down 2.81 points, or 0.21 percent, at 1,318.07. The Nasdaq Composite Index <.IXIC> was down 7.76 points, or 0.28 percent, at 2,781.31.

Also weighing on the Dow was Wal-Mart Stores Inc , which fell 2.1 percent to $55.54 after UBS downgraded the stock to neutral from buy. UBS said a sales recovery at the retail giant could take longer than expected.

With the Dow and S&P up 5 percent so far this year, some traders said the market was poised for a short-term correction.

According to Larry McMillan of McMillan Analysis Corp, 93 percent of traders in an industry survey were bullish on the S&P 500 futures on Tuesday, but the number fell to 90 percent at Wednesday's close. A drop below 90 percent, accompanied by a down day in the market, would be a sell signal.

New U.S. claims for unemployment benefits dropped to their lowest in 2-1/2 years, the government said on Thursday, in a sign the labor market was improving.

We're seeing continued declines in claims, that's where I hang my hat and say there's evidence companies are starting to hire, Russell said. That's a very good sign.

Disappointing earnings overseas hurt sentiment as Credit Suisse missed profit expectations. The bank's U.S.-traded shares dropped 7.4 percent to $43.21 while Deutsche Bank fell 2.8 percent to $62.46 on the New York Stock Exchange.

Soft drink and snacks maker PepsiCo Inc
cut its full-year earnings growth target, sending its shares down 1.8 percent to $63.29.

(Editing by Leslie Adler)