A breakout of fighting in the Middle East resulted in a selloff in the stock market. The U.S. equity market remains mired deep in the red, with the

Dow Jones Industrial Average having lost more than 300 points today. The bond market is rallying, as investors flock to the safety of Treasury securities. Oil prices are rising sharply on the news as well.

More locally, the Dow is most directly being affected by the earnings warning issued by big-box retailer

Home Depot

(HD) - Get Report

, which said earnings will fall short of expectations due to lower lumber and building materials prices. Rival

Lowe's

(LOW) - Get Report

issued a similar warning Oct. 6. Home Depot was lately down $13.94 to $35, and putting 83 points of negative pressure on the Dow.

An early rally on Wall Street was quickly eradicated after news of the death of two Israeli soldiers and the subsequent bombing of Palestinian compounds by Israel's army. Israel's stock exchange declined as investors fled the market for other safer investments. Israeli companies that trade on U.S. exchanges, such as

Check Point Software

(CHKP) - Get Report

, are down sharply.

The Nasdaq had been hanging in for a while, but has lately been slipping, pulled down to new lows by the weakness in the

New York Stock Exchange.

Crude oil prices have spiked as a result of the Israeli-Palestine conflict but also because of a suspected terrorist bombing of the U.S.S. Cole, a U.S. Naval destroyer, that killed four soldiers. The U.S. is highly dependent on the OPEC nations for oil; the political uncertainty surrounding the Middle East is provoking investors to hike the price of oil. A petroleum workers' strike in Venezuela is exacerbating the situation; the country is also a member of OPEC. November crude oil futures traded on the

New York Mercantile Exchange

were lately traded at $36.15, up from $33.25.

The major oil indices -- the

Amex Oil & Gas Index

and the

Philadelphia Stock Exchange Oil Service Index

-- were both strong, up 2.3% and 2.9%, respectively.

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Sector Watch

Financial stocks are among the hardest hit today. Banks and brokerages are reeling in today's action, and

Chase Manhattan

TST Recommends

(CMB)

is currently sitting at a 52-week low;

J.P. Morgan

(JPM) - Get Report

is off 6.4%, and the

Philadelphia Stock Exchange/KBW Bank Index

is down 5.7%.

Telecommunications companies are getting hurt also.

AT&T

(T) - Get Report

,

Sprint

and

Motorola

(MOT)

are all hitting 52-week lows after analyst downgrades of Motorola. The Nasdaq Telecommunications Index is off 4.4%.

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Bonds/Economy

Treasuries recouped early losses and moved into positive territory following reports of escalating violence in the Middle East.

Bond and note prices starting moving sharply off their lows shortly after 9 a.m., when news services started reporting that Israeli helicopter gunships were firing on the West Bank and that Palestinian President Yasser Arafat's headquarters in Gaza had been attacked. Arafat was reportedly unhurt.

As the world's safest and most liquid asset,

Treasury securities typically rally in response to reports of international strife. Short-maturity Treasuries, which are the most liquid, have benefited the most in today's action.

The bond rally is occurring in spite of the fact that oil prices spiked in response to the news. Because they are potentially inflationary, rising oil prices normally cause alarm in the bond market. Today, demand for safety and liquidity is trumping oil in the setting of bond prices.

The benchmark 10-year

Treasury note, down as much as 9/32 earlier, lately was up 15/32 at 100 9/32, dropping its yield to 5.711%.

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