U.S. stocks slipped on Wednesday after weak data on the services sector and private payrolls cooled recent optimism the recession was retreating, but the market finished off its lows as investors ventured into riskier financial shares.

The market's decline came on the heels of a four-day rally that had driven the three major U.S. stock indexes to close on Tuesday at their highest levels in nine to 10 months.

The services sector contracted in July, data showed, while another report said private employers cut 371,000 jobs last month. The ADP private-sector jobs report increased investors' caution ahead of Friday's government data on July non-farm payrolls.

The data reminds everyone this economic healing process is uneven and not every data point is going to go in a market- friendly direction, said Jeff Kleintop, chief market strategist at LPL Financial in Boston.

Disappointing corporate outlooks also weighed on the market and spurred investors to ease off from a rally that had pushed the Dow and the S&P 500 to nine-month highs. The Nasdaq had finished Tuesday's session at its highest close since early October.

Consumer products giant Procter & Gamble
was the biggest drag on the Dow after it reported a slide in quarterly sales. P&G's stock tumbled 2.8 percent to $53.91.

CISCO FALLS LATE

Cisco Systems could set a negative tone on Thursday after the company reported lower quarterly revenue after the closing bell and forecast first-quarter revenue would be down 15 to 17 percent year-over-year. In extended-hours trading, Cisco's stock fell 3.3 percent to $21.43 from its close at $22.17 on Nasdaq.

During the regular session, some of the market's worst performers, including American International Group , surged as confidence in the recent rally spread to companies with the biggest question marks still hanging over them. Analysts also pointed to a short squeeze as investors who had bearish bets scrambled to buy back their short positions on fears that stocks would continue to rise.

AIG shot up 62.7 percent to $22 ahead of the company's second-quarter earnings on Friday, which are expected to stabilize for the first time in five years.

The Dow Jones industrial average <.DJI> slipped 39.22 points, or 0.42 percent, to 9,280.97. The Standard & Poor's 500 Index <.SPX> shed 2.93 points, or 0.29 percent, to 1,002.72. The Nasdaq Composite Index <.IXIC> lost 18.26 points, or 0.91 percent, to 1,993.05.

BANK OF AMERICA CLIMBS

Among other financial stocks, Bank of America jumped 6.5 percent to $16.66, while the S&P financial index <.GSPF> jumped 3.3 percent.

American Express rose 5.8 percent to $30.36 after it said credit card defaults fell for a second straight month in July, helped by a lower-than-expected number of bankruptcies.

But earnings news was lackluster with Dean Foods down 9.2 percent to $19.38 after it gave a disappointing outlook.

Baker Hughes and Transocean also fell after they reported quarterly results that missed expectations. [ID:nN05189752] Baker Hughes' stock lost 7.8 percent to $38.68, while Transocean's shares slid 3.4 percent to $77.60.

On the data front, the Institute for Supply Management's services index dropped to 46.4 in July. Any reading below 50 indicates a contraction in the service sector, which accounts for about 80 percent of economic activity in the United States.

A report from ADP showed that private employers cut 371,000 jobs in July, suggesting the labor market remained weak. The U.S. Labor Department's non-farm payrolls report at the end of the week is expected to show 320,000 jobs were lost in July, according to economists polled by Reuters.

In a splash of positive data after the regular trading session began, the Commerce Department said new orders received by U.S. factories unexpectedly rose in June, advancing for a third-straight month.

Volume was active on the New York Stock Exchange, with 1.88 billion shares changing hands, above last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 2.41 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 8 to 7, while on the Nasdaq, more than eight stocks fell for every five that rose.

(Reporting by Leah Schnurr; Editing by Jan Paschal)