Updated from 4:16 p.m. EST

Stocks in the U.S. rallied out of the gate Thursday, but the major averages spent the bulk of the session in the red and closed lower following a much weaker-than-expected report on manufacturing activity in the mid-Atlantic region.

The Dow Jones Industrial Average lost 142.96 points, or 1.2%, at 12,284.30, and the S&P 500 was down 17.50 points, or 1.3%, at 1342.53. The tech-heavy Nasdaq Composite fell 27.32 points, or 1.2%, to 2299.78.

After a positive start, New York shares dropped significantly when the Federal Reserve Bank of Philadelphia said its monthly index sank to negative 24 from minus 20.9 in January. A number below 0 indicates a contraction in activity, and that was worse than economists' already poor average expectation of a negative 10 reading.

Evidence has been building for months that the economy is in danger of entering a recession, in no small part due to the carnage in the credit markets, which has led the Fed to sharply lower borrowing costs.

However, some data have remained upbeat, and policymakers have been reluctant to completely abandon the argument that too much easing could create inflationary pressures, especially in an environment of soaring commodity prices.

"This data just reinforces the fact that the Fed is likely to cut interest rates again even amid higher inflation," said Peter Cardillo, chief market economist with Avalon Partners.

Still, while traders might be comforted by falling rates, they also don't want to see the economy in a tailspin. Data such as the Philly Fed numbers, then, often end up muddying the picture more than they clear it up.

The market continues to be "basically stuck in this holding pattern," said Cardillo. "It continues to bounce around, and is still very much seeking direction."

Breadth was poor. About 3.62 billion shares changed hands on the New York Stock Exchange, and roughly 2.28 billion on the Nasdaq, with decliners beating advancers by a 7-to-3 margin.

In the tech space, Cisco ( CSCO) got an initial boost after Citigroup upgraded the company to buy from hold , citing its valuation. However, Cisco closed down a penny to $23.19, retreating from a sizable climb earlier in the day.

One of the top gainers was Research In Motion ( RIMM), which lifted its targets for subscriber additions. RIM shares jumped 9% to finish at $106.69.

Last time out, the release of the minutes from the most recent Fed meeting helped push financial stocks higher, while energy shares benefited from crude prices that exceeded $101 a barrel.

By the end of the session, the Dow closed up 90 points to 12,427, and the S&P 500 added 11 points to 1360. The Nasdaq rose 21 points to 2327.

"Investors found the silver lining in the minutes from the last Federal Open Market Committee meeting," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "The Fed members said they were willing to do more to fend off an economic recession, but remained concerned about inflation."

As the market unraveled today, however, Peter Morici, a business professor at the University of Maryland, took a darker view. He said that Fed interest rate cuts, together with the Bush administration's tax-rebate stimulus package and efforts to help subprime borrowers facing foreclosure, are "all about getting Americans borrowing again. That's like giving the hung-over alcoholic another drink."

"Reckless trade and energy policies and fraudulent banking," he says, "have set Americans for a tough bout with stagflation -- rising prices and unemployment."

As for commodities, gold futures hit an all-time high of $953.40 an ounce earlier, but ended the day down $2.30 to $943.80.

Crude oil slipped, as well, after the Energy Information Administration reported that U.S. crude stockpiles rose by 4.2 million barrels in the week ended Feb. 15 -- well above the expected build. Oil gave up 66 cents to $97.57 a barrel.

In earnings, department-store operator J.C. Penney ( JCP) posted a 10% drop in fourth-quarter profits, but the decline wasn't as steep as Wall Street's forecast. The company said, though, that it is "cautious" on the coming year and offered guidance below analysts' expectations. Shares ended up 8 cents to $48.03.

Elsewhere, bond insurers were again in focus after MBIA ( MBI) rebuked hedge fund manager Bill Ackman's plan to split up both that company and rival Ambac Financial ( ABK), claiming it only benefits Ackman's short positions on the companies. MBIA lost 2.3%, and Ambac slid 7.1%.

In more financial-sector news, CNBC reported that broker Lehman Brothers ( LEH) is cutting 200 jobs. Lehman stock surrendered 2.3% to end the day.

Similarly, coffee giant Starbucks ( SBUX) announced that it will fire around 600 employees amid a larger restructuring effort. The company, which recently reinstated founder Howard Schultz as CEO, has been struggling amid heightened competition. Shares closed off 2.4% at $17.83.

In M&A news, publisher Reed Elsevier ( ENL) will purchase data-services company ChoicePoint ( CPS) for $4.1 billion. ChoicePoint surged 43.4%.

Back on the economic front, the Labor Department said jobless claims fell by 9,000 to 349,000, as expected. The leading economic indicators declined 0.1%, as anticipated.

Treasury prices were on the rise. The 10-year note was up 1-4/32 in price to yield 3.75%. The 30-year bond was surging 1-7/32, yielding 4.53%.

Foreign markets were uniformly higher following the upside previous session in the U.S. Hong Kong's Hang Seng tacked on 0.1%, and Japan's Nikkei 225 jumped 2.8%.

In Europe, London's FTSE 100 and Germany's Xetra Dax retreated from more substantial intraday gains after the U.S. market took a turn for the worse, but they still closed higher. The bourses added 0.7% and 0.1%, respectively.

In more overseas news, France-based bank Societe Generale said it lost $4.96 billion (3.35 billion euros) in the fourth quarter thanks to last month's trading-fraud scandal, in which a rogue trader executed a series of false transactions that cost the bank more than $7 billion.