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Dow Drops Sharply on Interest Rate Jitters

Fox Market Wire

NEW YORK — The broad stock market indexes all took a dive Monday after speeches by three Federal Reserve Governors kindled new fears that the Fed is inclined to keep raising interest rates to fend off inflation.

The Dow Jones industrial average, which was up more than 1 percent shortly after the opening, slid 243.54 points, or 2.16 percent, to close at 11,008.17, a level not seen since the second day of trading in the new year, when it dipped below 11,000.

The technology-heavy Nasdaq composite index fell 139.32 points, or 3.29 percent, to 4,096.08, after being in positive territory most of the morning. It was the fourth-largest point drop in Nasdaq's history, but not in the top 10 in percentage terms. The previous fourth-biggest point decline was 138.43 points on April 19, 1999.

The market's downswing came after Federal Reserve Bank of Atlanta President Jack Guynn said he did not see many signs that the Fed's three interest rate hikes in 1999 were slowing consumer demand

The Federal Reserve's policy-setting committee is scheduled to meet on Feb. 1-2 to decide whether to raise interest rates again. Guynn is a voting member.

"You have to look for a sell-off to happen at any time, and it could happen this week," said Ricky Harrington, the technical analyst and senior vice president at Wachovia Securities in Charlotte. N.C. "A thoughtful money manager has to say this market is fighting the Fed. No one knows what it's going to take to cool this market."

Even though the benchmark 30-year U.S. Treasury bond was up 4/32 with a yield at 6.69 percent, analysts said the fear of an aggressive interest rate hike from the Federal Reserve in February continued to pressure stocks.

"It's kinda like the movie Groundhog Day, where you wake up and its Groundhog Day all over again. Tech's doing pretty well, especially the chip stocks led by Intel. And you've got everybody else reacting to worries over the Fed, interest rates, an economy that's too strong, oil prices," said Alan Skrainka, the chief market strategist at Edward Jones in St. Louis.

Pharmaceuticals, building materials, hotel and gold stocks were down while Internet, semiconductors and speciality health care stocks were up.

The Dow Jones industrial average, which was up more than 1 percent shortly after the opening, was down 29 points, or 0.26 percent, at 11,22, with a heavy weight in Procter & Gamble, which was off 4-3/16 at 98-1/2 before it was halted to announce it terminated three weeks of merger talks with Warner-Lambert Co and American Home Products Corp..

P&G; said it will explore its options, including talks with Pfizer Inc., which was down 1-1/2 at 33-9/16.

Pulling the Dow in the other direction was Intel, which was up 5-1/4 at 103-3/16 after Dan Niles, an analyst at Roberston Stephens said Intel was seeing its best January start in several years.

American Express Co., was up 3-9/16 at 155-1/4 on expectations that its earnings report, set for Monday afternoon, would be positive.

Eastman Kodak Co., another Dow component, was up 2-15/16 at 63-11/16 after it reported earnings of $1.50 a share, compared with the $1.24 expected by analysts polled by First Call/Thomson Financial.

Of the nearly 400 companies that have reported earnings so far, 85 percent have met or topped expectations, Gruntal's chief investment strategist, Joseph Battipaglia, writes in his weekly perspectives note to investors.

"The underlying strength in earnings alone, however, should provide a solid basis for equities to outperform in the weeks and months ahead," he said.

The Nasdaq composite index was off its morning high, but still in positive territory. It was up 27 points, or 0.65 percent, at 4,262, on the heels of its third consecutive record close on Friday.

The broader Standard & Poor's 500 index was down 4 points, or 0.28 percent, at 1,437.

Time Warner was down 2-5/16 at 88-15/16 on news it would merge its music business with Britain's EMI Group Plc to create the world's top record company, worth $20 billion, with a powerful presence on the Internet.

Declining shares outpaced advances by 14 to 13 with more than 496 million shares traded on the New York Stock Exchange. There were 82 stocks at new highs and 81 at new lows.

On the Nasdaq, advancing stocks outpaced declines 11 to 8 with more than 949 million shares traded. There were 400 new highs and 51 at new lows.

Other stocks in the news included regional telephone company Bell Atlantic Corp. which rose 1/8 to 60-3/16 after it reported a 12 percent increase in profits, in line with Wall Street expectations.

Internet music company Liquid Audio Inc. was up 8-1/2 at 34-3/8 after Microsoft Corp. said it was in a deal with the Redwood City, Calif-company to bring order to the online music marketplace.

Electronics component maker Siliconix Inc. was up 58-3/4 at 222-1/2 after reporting earnings of $2.45 per share compared with 65 cents a year ago.

Apartment and commercial real estate company Echelon International Corp. was up 5-11/16 at 33-3/16 after it agreed to be bought by EIN Acquisition Corp. for $228 million cash.

— The Associated Press and Reuters contributed to this report.

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