Stocks extend Friday drop

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NEW YORK -- Wall Street dropped in volatile trading Monday as investors pulled away from stocks amid worries about the credit and housing markets and disappointing corporate earnings.

The market remained uneasy although several companies including drug maker Merck & Co. and toymaker Hasbro Inc. reported decent third-quarter results. Investors were still mindful of the downbeat profit outlooks from some blue chip companies last week and Standard & Poor's downgrade of another series of mortgage-backed securities; those developments sent stocks plunging Friday, taking the Dow Jones industrials down 366 points.

Over the weekend, the world's economic leaders not only said that calming the turbulent global financial markets will require vigilance, but they also warned of inflation risks -- which puts central banks like the U.S. Federal Reserve in a tight spot. The Fed lowered interest rates on Sept. 18 to make borrowing cheaper amid a growing credit market crisis, and Wall Street hopes policy makers reduce rates again when they meet next week.

Fed Governor Randall Kroszner at a speech in Washington reaffirmed that the central bank will "act as needed" to calm the financial markets, according to Dow Jones Newswires. He also said problems with structured credit products -- which dampened the profits at several banks in the third quarter -- are recovering, but gradually.

Though the Fed is willing to help boost liquidity, concerns about problems in the financial industry are running high -- concerns that make the record highs reached last week by the Dow and the Standard & Poor's 500 index appear unreasonable.

"It may take a little time here, a week or two, of trying to heal," said Steven Goldman, chief market strategist, Weeden & Co. "As we enter the last two months of year, we have a better opportunity to get back to those levels by year end."

In late morning trading, the Dow was off 89.99, or 0.43%, at 13,432.03, after falling more than 100 points earlier in the session.

The S&P 500 index fell 7.92, or 0.53%, at 1,492.71.

The Nasdaq composite index, after bobbing into positive territory, fell 2.26, or 0.08%, at 2,722.90.

Overseas markets were also unsettled. In Asian trading, Japan's Nikkei stock average declined 2.24%, while Hong Kong's Hang Seng index dropped 3.7%. In European trading, Britain's FTSE 100 fell 0.99%, Germany's DAX index fell 1.28%, and France's CAC-40 fell 1.75%.

Treasury bonds slipped as investors cashed in on Friday's steep gains. The yield on the 10-year note, which moves inversely to its price, rose to 4.41% from 4.40% late Friday.

On Friday -- the 20-year anniversary of the Black Monday crash -- investors sold off stocks and bought up safer assets like U.S. Treasury bonds as the prospect of a thaw in the frozen credit markets grew dimmer.

The Dow finished last week down 4.05%; the S&P 500 index finished down 3.92%; and the Nasdaq composite index ended down 2.87%.

Most major companies reporting earnings Monday posted solid increases in income. Hasbro rose $1.29, or 4.5%, to $29.70 on its results, and Merck rose 11 cents to $53.22.

Schering-Plough Corp.'s profit gain fell short of expectations, however. The drug maker fell $2.71, or 8.3%, to $30.

Investors were also worried about the mortgage finance sector and the specialty finance sector after they were downgraded by Lehman Brothers.

Crude oil futures fell $1.97 to $86.63 a barrel on the New York Mercantile Exchange.

Gold also plunged, while the dollar rose against most other major currencies, except the yen.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 450.8 million shares.

The Russell 2000 index of smaller companies fell 4.50, or 0.56%, to 794.29.
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