Feb. 16 (Bloomberg) -- U.S. stocks declined as housing construction slowed and shares of Microsoft Corp. plunged, tempering the Dow Jones Industrial Average's best weekly advance in two months.

Thirteen of the 16 homebuilders in Standard & Poor's indexes dropped. Microsoft, the world's biggest software maker, tumbled the most in six months and was the worst performer in the Dow average. Chief Executive Officer Steve Ballmer said some analysts' revenue forecasts for Vista are too high.

``I don't think we're out of the woods on housing by any means,'' said William Fitzpatrick, an equity analyst at Johnson Asset Management, which oversees $1.6 billion in Racine, Wisconsin. ``We may have a long way to go on housing. And if there's a ripple effect, it could slow down our economy.''

Builders in the U.S. started work last month on the fewest number of new homes since August 1997. While Federal Reserve Chairman Ben S. Bernanke this week noted signs of ``stabilization'' in the housing market, the figures show residential construction remains a drag on economic growth.

The Dow average lost 13.22, or 0.1 percent, to 12,751.79 at 2:48 p.m. in New York. The S&P 500 dropped 2.67, or 0.2 percent, to 1454.14. The Nasdaq Composite Index declined 2.22, or 0.1 percent, to 2494.48.

Stocks gained yesterday, pushing the Dow industrials to a second consecutive record, as falling import prices reinforced expectations the Fed will cut interest rates. The rally began three days ago when takeover speculation boosted mining shares.

Weekly Gain

For the week, the Dow average is up 1.4 percent, poised for its best rise since November. The S&P 500 has climbed 1.1 percent, while the Nasdaq has gained 1.4 percent.

U.S. exchanges will close Feb. 19 for Presidents' Day.

Housing starts in January slumped 14.3 percent to an annual rate of 1.408 million, the Commerce Department said. Economists in a Bloomberg News survey expected 1.6 million. Building permits, consumer confidence and producer prices also fell, reports today showed.

Treasuries rose, pushing the 10-year note's yield toward the biggest weekly drop in more than two months, as the data suggested a slowing economy.

Gross domestic product, the sum of all goods and services produced, will grow at an annual rate of 2.5 percent from January through March, according to a Bloomberg survey of economists from Feb. 1 to Feb. 8. The economy expanded 3.5 percent last quarter.

`Take a Chunk'

If the housing slowdown ``hits the consumer, you can expect that it will take a chunk out of GDP,'' said Michael Mullaney, who manages $10 billion at Fiduciary Trust Co. in Boston. That ``will affect earnings and cause, at some point, weakness in stock prices.''

An S&P gauge of homebuilders fell 0.9 percent for its first decline in four days. D.R. Horton Inc., the largest U.S. homebuilder by market value, lost 23 cents to $28.06. Lennar Corp., the second biggest, dropped 51 cents to $52.69.

Microsoft, which began selling its Vista operating system to consumers on Jan. 30, was the second-biggest drag on the Dow average. The stock tumbled 65 cents, or 2.2 percent, to $28.81.

Some analysts' forecasts for Vista revenue are ``overly aggressive,'' Ballmer told analysts yesterday in New York. Investors expect Vista to propel Microsoft's sales for the next 18 months. The Windows unit is Microsoft's biggest money maker.

Other software makers also fell. Novell Inc., which sells networking software, dropped 6 cents to $6.95. Symantec Corp., the world's biggest maker of computer anti-virus products, declined 36 cents to $17.88.

GM, Chrysler

DaimlerChrysler AG's U.S.-traded shares jumped $3.05 to $73.30, the highest since January 2000. General Motors Corp., the world's largest automaker, is negotiating to buy its Chrysler unit, Automotive News reported, citing people familiar with the talks in Germany and the U.S.

GM shares gained 10 cents to $36.54.

``We routinely talk to other automakers about areas of mutual interest,'' said GM spokeswoman Renee Rashid-Merem, who declined to comment further. Chrysler spokesman Mike Aberlich declined to comment.

Goodyear Tire & Rubber Co., the largest tire maker in North America, retreated 45 cents to $24.96. The company said its fourth-quarter loss widened to $2.02 a share from 29 cents a year earlier on costs related to a three-month strike.

Career Education Corp., which operates more than 80 campuses in the U.S. and overseas, dropped $2.31 to $27.33. The company said fourth-quarter net income fell 71 percent from a year earlier as enrollment declined.

Profit Growth

Companies posted a 9.9 percent gain in fourth-quarter profit through yesterday, with 82 percent of the S&P 500 members having reported results, according to data from Bloomberg. Earnings this quarter will probably rise 4.1 percent, according to analysts' estimates. Average profits in the S&P 500 have climbed by at least 10 percent since the third quarter of 2002.

Rising oil prices, which increase companies' costs and drive inflation, also helped drag down the market.

Crude futures added 2 percent to $59.14 a barrel in New York after the U.S. warned that militant attacks in Nigeria, Africa's biggest oil producer, may expand to new areas and become more violent.

A measure of consumer companies in the S&P 500 gained 0.2 percent for the second-best performance among 10 industry groups.

Campbell Soup Co. had the steepest gain in the S&P 500. The world's largest soupmaker posted a fiscal second-quarter profit of 72 cents a share, topping the 63-cent average analyst estimate compiled by Bloomberg, after it raised prices for some products. The shares increased $2.43, or 6.1 percent, to $42.01.

Colgate Upgrade

Colgate-Palmolive Co., the world's biggest toothpaste maker, added 65 cents to $68.56. Banc of America Securities LLC raised its recommendation on the stock to ``buy'' from ``neutral.''

Airline shares rallied after Business Week reported on its Web site that AMR Corp., parent of the world's largest carrier, could be a buyout target. AMR gained 76 cents to $38.81.

Goldman Sachs Group Inc. and British Airways Plc are among a group of investors that may offer AMR between $46 and $52 a share, or $9.8 billion to $11.1 billion, Business Week said, citing people familiar with the matter.

Spokespeople from AMR, Goldman and British Airways declined to comment.

UAL Corp., the parent of United Airlines, climbed 11 cents to $44.61. Continental Airlines Inc., the fourth-largest U.S. carrier by passenger traffic, increased 46 cents to $44.86.

Compass Bancshares Inc. added $4.04 to $70.41 after Banco Bilbao Vizcaya Argentaria SA, Spain's second-biggest bank, agreed to buy the Alabama-based bank for $9.6 billion. Part of the offer will be made in new Banco Bilbao shares and part in cash, the Spanish bank said. The cash bid of $71.82 a share is 8.2 percent more than Compass's last closing price.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: February 16, 2007 14:53 EST