Stocks trimmed their losses but closed lower Thursday afternoon amid reports that a top al Qaeda member had been cornered near the Afghanistan-Pakistan border.

The Dow Industrials lost 4.52 points, or 0.04%, to close at 10,295.78 after a two-day, 200-point rally; the S&P 500 finished down 1.44 points, or 0.13%, to 1122.31; and the Nasdaq lost 14.32 points, or 0.72%, to 1962.44, after being down more than 1% earlier in the session.

Trading volume on the New York Stock Exchange approached 1.4 billion shares, while nearly 1.7 billion shares changed hands on the Nasdaq. Decliners outpaced advancers on both exchanges by about 5 to 4.

"There was some excitement about the idea that Osama bin Laden might be captured," said Brian Pears, head equity trader at Victory Capital Management. Later reports indicated it was not bin Laden, but the group's No. 2 member.

Richard Williams, equity strategist at Summit Analytic Partners, said the afternoon rally was just a "corrective bounce" that will likely be unsustainable. "We'll probably go to 1130 or 1140 on the S&P, but investors are seeing such a consistent, steady flow of data that suggests the economy is slowing that it's hard to get excited about the quarter," he said.

Nevertheless, the afternoon enthusiasm marked a notable reversal of earlier declines, triggered by the recent surge in oil prices, mixed economic data and continuing legal headaches for Microsoft ( MSFT).

"We're still in a correctional phase," said Larry Wachtel, senior market analyst at Wachovia Securities. "It was rather vicious last week because of emotions, and we've come back from that, but we're still in a correctional phase that I think will last through March."

"I think the April earnings season could be a positive catalyst that will get us back on track," added Wachtel.

The 10-year Treasury note traded down 10/32, to yield 3.75%. The yen surged against the dollar after Japan's finance minister suggested for a third day that Tokyo may scale back currency sales. The dollar recently bought 106.72 yen, compared to 108.27 at Wednesday's close. The euro was also stronger, buying $1.2382 compared to $1.2237.

Overseas markets were mostly lower, with London's FTSE 100 closing down 1.3% to 4398 and Germany's Xetra DAX losing 1.8% to 3827. In Asia, Japan's Nikkei gained 0.4% to 11,484, while Hong Kong's Hang Seng lost 1.2% to 12,816.

Crude oil was lower in New York trading after futures touched a 13-year high Wednesday on concerns about tightening gasoline inventories in the U.S. The April futures contract was off 30 cents to $37.88 on the Nymex.

On the economic front, January's producer price index numbers, delayed for a month because of technical problems, were finally released. They showed an unexpected 0.6% jump in prices, compared with December's rise of 0.2%. Consensus estimates were forecasting a 0.4% rise.

Core prices, minus food and energy, rose 0.3%, much more than the 0.1% forecast. The release date for the February's PPI, originally scheduled for March 12, remains undetermined.

Also, initial jobless claims in the week ended March 13 fell by 6,000 to 341,000; economists were forecasting 345,000.

The Conference Board's leading economic indicators index was unchanged in February. The index was expected to increase 0.1%, after January's 0.5% gain.

The Philadelphia Federal Reserve Bank's survey of manufacturing activity in March fell to a reading of 24.2, vs. 31.4 in February. The index was expected to drop to 29.5. A related employment index also declined, if only slightly.

In Europe, antitrust regulators announced Thursday they had failed to reach a settlement with Microsoft over monopolistic business practices, opening the door to legal action and a fine when a penalty is proposed next week. EU Competition Commissioner Mario Monti said the punishment would set a "clear precedent" when it is unveiled next Wednesday. Microsoft shares closed 25 cents, or 1%, to $24.88.

Royal Dutch/Shell ( SC) cut its proven reserves that measure the company's health, signaling that its battered oil and natural gas reserves position is even worse than it previously acknowledged. Also, the oil giant said it will delay release of its annual report, due Friday, by two months until May, postpone dividend payments to May from March 31 and delay a filing on the state of its reserves to the Securities and Exchange Commission, which is investigating Shell for improper reserve disclosures. Shares closed down 55 cents, or 1.3%, to $40.50.

United Technologies ( UTX) confirmed its outlook for earnings of $5 to $5.30 a share in 2004 at its annual conference of investors and analysts. Consensus estimates are forecasting earnings of $5.22 a share for the year, compared to $4.69 a share in 2003. Shares closed 76 cents, or 0.9%, to $88.04.

Morgan Stanley ( MWD) beat Wall Street's expectations for its first-quarter earnings. The firm said earnings rose to $1.23 billion, or $1.11 a share, from $905 million, or 82 cents a share, a year ago. Consensus estimates were forecasting its earnings at 96 cents a share. Shares closed down 51 cents, or 0.8%, to $59.95.

Barnes & Noble ( BKS) reported a higher fourth-quarter profit that met expectations as the company cut losses from its Internet division. The bookseller said net income increased to $130.0 million, or $1.65 per share, from $111.0 million, or $1.49 a share, a year earlier. The consensus estimate was for $1.65 a share. Shares closed down 17 cents, or 0.5%, to $33.88.

Williams-Sonoma ( WSM) beat consensus estimates for its fourth-quarter earnings. The kitchen and home products retailer reported earnings of $102.1 million, or 85 cents a share, compared with $79.8 million, or 67 cents a share, a year ago. The consensus estimate was for 84 cents a share. Shares finished up 68 cents, or 2%, to $33.48.

Kmart Holdings ( KMRT)said its fourth-quarter earnings increased 8.2%. The discount retailer reported quarterly earnings of $276 million, or $2.78 a share, compared with a year-ago loss of $1.1 billion, when the company was in bankruptcy reorganization. Its shares closed up $2.38, or 6.9%, to $37.06.

Jabil Circuit ( JBL) reported after Wednesday's close that its second-quarter profit nearly quadrupled as the contract electronics manufacturing sector recovers. Shares closed down 20 cents, or 0.7%, to $27.96.

No earnings or economic news is expected out Friday.

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