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Stocks Erase Worst of Losses

The major averages rally into the close as the financials recover.

Updated from 4:18 p.m. EDT

The

Dow Jones Industrial Average

used a rebound in the financial sector to come almost all the way back from a 343-point loss Thursday before ultimately closing just slightly negative.

After overcoming a brutal drop that had stocks at their worst around midday, the Dow finished down only 15.69 points, or 0.12%, at 12,845.78.

The

S&P 500

did recover fully, and rose 4.56 points, or 0.32%, to 1411.26. The

Nasdaq Composite

shed 7.76 points, or 0.32%, to 2451.07, though it was well above its lowest level.

Bears were in charge early as fears about the credit market continued to encircle the globe, and the Dow even had a loss of more than 200 points past 3 p.m. EDT, but a turnaround in big financial stocks gave the indices a chance to bounce back.

"Over the near term, equity markets are likely to remain volatile," said Michael Sheldon, chief market strategist with Spencer Clarke LLC. "However, hopefully we have seen the lows for at least a short while."

Phillip Roth, chief technical market analyst with Miller Tabak, isn't sure the trouble that has meant chaotic trading of late is necessarily over.

"There was emotional selling today that brought us to our lows of the day," he said. "The S&P 500 came very close to its March lows, which have acted as a support level. At best, though, we're setting up for an interim rally. The majority of stocks are below their 200-day moving averages, so at this juncture the overall trend is still to the downside."

Despite the recovery, breadth remained poor. On the

New York Stock Exchange

5.91 billion shares changed hands. Decliners topped advancers by a 2-to-1 margin. Volume on the Nasdaq reached 3.29 billion shares, with losers outpacing winners nearly 3 to 2.

One of the major headlines was

Countrywide

(CFC)

, whose shares plummeted 11% after the lender said it would borrow $11.5 billion from its credit line in order to fund new loans. Following the news, both Fitch Ratings and Moody's Investors Service downgraded Countrywide's and other lenders' debt ratings.

However, buyers stepped in to prop up the broader financial sector. Among the best gainers,

Bear Stearns

(BSC)

surged 12.9%,

Lehman Brothers

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rose 6.2%,

JPMorgan Chase

(JPM) - Get Free Report

gained 5.7%, and

Citigroup

(C) - Get Free Report

rose 4.3%.

"The financials have begun to improve, and that was certainly encouraging," said Larry Wachtel, senior market analyst with Wachovia Securities. "We had all the makings of a bottom. When we have this intense fear among traders, the market and financials can turn at any time."

On Wednesday, investors continued to fret about the extent and impact of the credit market crisis on corporate earnings and the economy. Countrywide shares dumped 13%, and

KKR Financial Holdings

(KFN)

tanked 31.1%.

Last time out, the Dow plunged 167.45 points, or 1.29%, to 12,861.47, the first time the index has closed below 13,000 since April. The S&P lost 19.84 points, or 1.39%, to 1406.70, putting it in negative territory for the year. The Nasdaq slid 40.29 points, or 1.61%, to 2458.83.

The selling at home begat selling overseas. Tokyo's Nikkei 225 fell 2%, and Hong Kong's Hang Seng plummeted 3.3%. London's FTSE was worse by 4.1%, and Frankfurt's DAX dropped 2.4%.

"Now investors will have to look towards the foreign markets for tomorrow's direction," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "That might add some stability to the U.S. market tomorrow, but it's still too premature to say that we're over and done with declines."

Pavlik added that the volatility will most likely remain because the market is trading on momentum. "There wasn't anything in the fundamentals to back up this shift in late-day trading, so we'll have to see if the buyers keep bargain-hunting tomorrow," he said.

Earlier, the

Federal Reserve

poured an additional $17 billion into the U.S. financial system through two separate repurchase operations that will extend over the next 14 days.

Meanwhile, St. Louis Fed President William Poole told

Bloomberg

that subprime mortgage woes are still not a threat to the U.S. economy. Only a "calamity," he said, would prompt the Fed to cut interest rates.

Treasury prices were rallying as investors scrambled for a safe haven. The 10-year note was higher by 31/32 in price, cutting the yield to 4.60%, and the 30-year bond rose 1 & 19/32, yielding 4.92%. The dollar sank against the yen and euro.

"The yen went to a five-month high vs. the dollar. This may have caused some unwinding of the carry trade," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "Every time we have seen this carry-trade issue pushed, we see the futures get hit hard."

Energy and commodity prices were on a steep decline. Oil prices dropped after their recent uptrend. The front-month September crude contract tumbled $2.33 to close at $71 a barrel, as Tropical Storm Erin weakened to a tropical depression after it made landfall along the Texas coast.

Gold futures dove $21.70 to finish at $658 an ounce, and silver was down $1.06 to $11.49 an ounce.

Among subsector indices, the Philadelphia Gold & Silver Index dumped 4.9%, the Philadelphia Oil Service Sector Index ended down 3.1%, and the Amex Oil Index lost 0.8%.

Separately, more bad news for the housing sector arrived. The Commerce Department said U.S. housing starts fell a greater-than-expected 6.1% in July to 1.38 million annualized units, the lowest level in more than 10 years. On average, economists expected new starts to total 1.40 million units.

The report had even more disappointments, as building permits dropped 2.8% to 1.37 million last month, below the expected 1.40 million annual pace.

Elsewhere on the economic docket, the Labor Department said that initial jobless claims rose by 6,000 last week to 322,000.

Among earnings,

J.C. Penney

(JCP) - Get Free Report

beat second-quarter estimates by a penny, and its shares rose 2.5%.