Updated from 11:50 a.m. EDT

U.S. stocks entered a tough midday slump Tuesday, as another rally in oil prices countered the effects of bullish analyst calls on the financial sector and stronger-than expected manufacturing data.

The

Dow Jones Industrial Average

was recently down 132 points at 11,218, and the

S&P 500

was off 14 points at 1266. The

Nasdaq

was down 31 points at 2262.

Crude oil continued to weigh on stocks. Recently, oil was up $2.32 to $142.32 a barrel on concern that Israel would bomb Iran over its nuclear program, a move that would cause supply disruptions and potentially stoke a regional conflict in the Middle East. Gold was adding $16.80 to $945.10.

Kenny Landgraf, president and founder of Kenjol Capital Management, said that the run-up in oil and a selloff in overseas markets hurt sentiment. "It's a pretty negative tone coming into the day. You know, 'Why buy stocks?'"

On the corporate front, several financial firms were working to improve or eliminate their exposure to the housing market.

Wachovia

(WB) - Get Report

said it would stop offering its controversial Pick-A-Payment mortgages.

Meanwhile,

CIT Group

(CIT) - Get Report

announced it would be selling its home lending business to Lone Star Funds for $1.5 billion in cash and $4.4 billion in debt. The company said it will also get rid of its manufactured housing portfolio to Vanderbilt Mortgage and Finance. CIT said it was seeking to eliminate uncertainty caused by exposure to the housing market.

In response to its own credit crunch-related woes, Swiss bank

UBS

(UBS) - Get Report

announced

the resignation of four directors and new corporate governance

. The new structure will draw a clearer line between the responsibilities of the board and those of senior management.

Some analysts saw bright spots for the troubled financial sector. UBS upgraded

Capital One

(COF) - Get Report

,

American Express

(AXP) - Get Report

and

Discover Financial

(DFS) - Get Report

to neutral from sell, and Morgan Stanley initiated coverage on

Lehman Brothers

(LEH)

and

Goldman Sachs

(GS) - Get Report

with overweight ratings.

Lehman stood out on Monday by dropping 11% on speculation that the brokerage may have to sell itself at a discount.

Of the raised ratings for the financials, Landgraf said people begin to see value in the sector at these depressed price levels. "Anybody that's trying to go into that area, you're wading into the waters where there's a lot of selling pressure from the hedge funds. ... We continue to avoid

the sector because there's so many bombs there."

He also pointed out that even analysts can't figure out the financial space. "A lot of guys have tried to find the bottom only to get their hands mashed and bloody," he said. He's waiting for an end to the writedowns and signs that institutional money is going into the space before he gets involved, he said.

A cloud of negativity persisted for other names in the space, as

JPMorgan Chase

(JPM) - Get Report

suffered a Fox Pitt downgrade to in line from outperform. Jefferies and Friedman Billings both cut their price targets for

Legg Mason

(LM) - Get Report

.

Elsewhere, Citigroup initiated bullish coverage on the oil services sector, slapping a hold sticker on

Baker Hughes

(BHI)

and

Smith International

(SII)

, and putting a buy rating on

Schlumberger

(SLB) - Get Report

,

National Oilwell Varco

(NOV) - Get Report

and

Halliburton

(HAL) - Get Report

.

JPMorgan analysts offered positive predictions for media plays, assigning overweight status to

Outdoor Channel

(OUTD)

,

Cablevision

(CVC)

and

Comcast

(CMCSA) - Get Report

as well as neutral ratings on

EarthLink

(ELNK)

and

Charter Communications

(CHTR) - Get Report

.

News business

New York Times

(NYT) - Get Report

also caught a Deutsche Bank upgrade to hold from sell. Meanwhile, by-mail DVD rental

Netflix

(NFLX) - Get Report

got bumped to hold from underperform by Needham.

In the retail and health space,

MedcoHealth

(MHS)

,

CVS Caremark

(CVS) - Get Report

and

Express Scripts

(ESRX)

are merging their prescription network with a group of retailers, including

Wal-Mart

(WMT) - Get Report

. Parties to the deal expect the move to accelerate the transfer to electronic prescriptions from paper.

Barring gold companies, the mining sector was taking some knocks as merger activity continued to hum.

ArcelorMittal

(MT) - Get Report

was down 5% after the company acquired

Astralloy Products

, a subsidiary of

IMS International Metal Service

.

Rio Tinto

(RTP)

was down 6% after ramping up during Monday trading.

Dow component

Alcoa

(AA) - Get Report

led the index in its decline, losing 4.9%.

The transportation sector also saw some profit-taking. The Dow Jones Transportation Average lost 3% to 4802.

In technology, telephone company

AT&T

(T) - Get Report

said that, for a $400 fee, it would offer

Apple's

(AAPL) - Get Report

new iPhone

without making customers sign up for AT&T service

.

In the realm of economic data, the June ISM index, which offers nationwide insight into the health of the manufacturing sector, rose to 50.2 from 49.6 in May. Analysts were expecting a reading of 48.6.

"As soon as they came out with that number, all of the indexes kind of jumped back up. That was the main catalyst," Landgraf said. Before the open, it looked like 'Oh no, we're going to get pounded again.'"

The revised number for May construction spending was unchanged at a decline of 0.4%, slightly better than the consensus estimate for a dropoff of 0.6%.

Ford

(F) - Get Report

announced that June auto sales were down an unadjusted 28%, largely due to slumping truck sales. Shares dropped 6% on the news.

Treasury prices were higher. The 10-year note was tacking on 5/32, yielding 3.95%, and the 30-year was up 4/32 to yield 4.52%. The dollar was weaker against the euro, the yen and the pound.

Abroad, markets were taking a hit. All the major European exchanges, including London's FTSE, Frankfurt's Dax and the Paris Cac were down. In Asia, Japan's Nikkei was off slightly, while Hong Kong's Hang Seng was ticking higher.