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Stocks Fight Off U.K. Scare

Wall Street rebounds after trouble at an overseas mortgage lender led to early losses for the market.

Updated from 4:05 p.m. EDT

Stocks clawed back from an early tumble Friday and closed to the upside as traders managed to look past trouble for an overseas mortgage lender and a mixed bag of economic data.

After dropping 100 points just after the open, the

Dow Jones Industrial Average

fought its way higher and finished ahead by 17.64 points, or 0.13%, at 13,442.52. The

S&P 500

tacked on 0.30 point, or 0.02%, at 1484.25, and the

Nasdaq Composite

rose 1.12 points, or 0.04%, to 2602.18.

The initial weakness came after U.K. lender

Northern Rock

sought emergency funding from the Bank of England. The company also warned that 2007 earnings will come in below current estimates and that profits in 2008 will be hit. Shares of Northern Rock slid more than 20% in European trading.

Bourses across the Atlantic fell hard following the news, but were rebounded near the end of their session. London's FTSE 100 was down 1.2%, the CAC 40 in Paris was off 0.5%, and Germany's Xetra Dax was lower by 0.5%.

On the other hand, indices in Asia jumped following a strong session in the U.S. last time out. Japan's Nikkei 225 climbed 1.9% and Hong Kong's Hang Seng rose 1.5% overnight.

"A lot of people now think we're near the end of this subprime issue," said Paul Mendelsohn, chief investment strategist with Windham Financial. "There's not much transparency to it and the flight-to-quality is still there, but it's not as massive. That could indicate that the unwinding of the carry trade is slowing down to the point where it's not significant, which is a sign of things leveling off."

In addition to the news out of Northern Rock, traders also had to deal with a weaker-than-expected report on consumer spending and a flood of other data.

Ahead of the market's open, the Commerce Department said retail sales rose 0.3% in August. Economists, however, had expected a 0.5% increase. Excluding autos, retail sales unexpectedly fell 0.4% last month, compared with forecasts of a 0.2% rise.

Ian Shepherdson, chief economist with High Frequency Economics, said the data weren't a disaster, but that the spending trend is clearly slowing.

"What matters now is the extent of any fall rebound," said Shepherdson. "Lower confidence and the accelerating housing collapse will hurt."

At the same time, the Labor Department said its import price index slipped 0.3% last month, the first decline in eight months, as petroleum prices fell 1.3%. Economists, though, expected the index to fall 0.4%.

Elsewhere on the economic front, the

Federal Reserve

said industrial production rose 0.2%, slightly below expectations, while capacity utilization was flat at 82.2%.

Meanwhile, the University of Michigan said its consumer sentiment index inched higher to a reading of 83.8 this month from 83.4 in August, matching estimates.

"This is very positive market activity now that we've gotten some numbers out of the way," said Mendelsohn. "It's good the market keeps coming back. We're not giving back much of the gains we got, so that's good news. It's all about the Fed meeting next Tuesday now. People may also be positioning against options expiration next week, so there's going to be volatility."

U.S. Treasury prices were steady following the data. The 10-year bond rose 1/32 in price, yielding 4.46%. The 30-year note added 3/32, yielding 4.72%.

The major averages finished the five sessions with big gains. The Dow rose 2.5%, the S&P 500 gained 2.1%, and the Nasdaq ended up 1.6%.

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Breadth was slightly positive to end the week. On the

New York Stock Exchange

2.70 billion shares changed hands, as advancers topped decliners by a 6-to-5 margin. Volume on the Nasdaq reached 1.57 billion shares, with winners outpacing losers nearly 8 to 7.

On Thursday, positive headlines out of blue-chip giants

McDonald's

(MCD) - Get Report

and

General Motors

(GM) - Get Report

helped U.S. major averages notch a winning session.

The Dow rose 133.23 points, or 1%, to 13,424.88, and the S&P 500 was up 12.39 points, or 0.84%, at 1483.95. The Nasdaq lagged behind but was better by 8.99 points, or 0.35%, at 2601.06.

These gains came despite record oil prices, as the October front-month crude contract finished above the $80-a-barrel level for the first time. During Friday's session, though, oil slid 99 cents to end at $79.10 a barrel. The contract notched a 3.1% increase for the week.

GM was in focus again in the new session, as the automaker reportedly is the lead company in labor negotiations with the United Auto Workers union. The current labor contract expires at midnight. Shares of GM rose 93 cents, or 2.8%, at $34.22.

Dow components

Intel

(INTC) - Get Report

and

American Express

(AXP) - Get Report

were lower after Merrill Lynch downgraded both to neutral from buy. Intel ended down 42 cents, or 1.7%, at $24.93. American Express fell $1.66, or 2.7%, to $58.94.

On the other hand, shares of handheld PC maker

Palm

(PALM)

were higher after Morgan Keegan upgraded the stock to outperform from market perform, based on valuation. Palm climbed 59 cents, or 4%, to $15.50.

Research in Motion

(RIMM)

was started with an outperform rating and a $100 price target at BMO, and RBC raised its target on the stock by $27 to $110. RIM finished higher by $1.52, or 1.8%, to $87.26.