U.S. stocks fell Thursday amid a mix of weak economic data and disappointing earnings news.

However, losses could have been worse, as major indexes battled back to cut in half earlier declines of 3% to 4%. The 30-stock Dow Jones industrial average ended Thursday down 105.3 points, or 1.28%, at 8,122.80. The broader S&P 500 index fell 12.74 points, or 1.52%, to 827.50. Bad news from technology earnings reports hit the Nasdaq composite hardest, sending the tech-heavy index down 41.58 points, or 2.76%, to 1,465.49.

On the New York Stock Exchange, 24 stocks were falling for every seven in positive territory. On the Nasdaq, the ratio was 20 to 7 negative.

Stocks could once again be returning to their lows of October and November, warned Peter Cardillo, chief market economist at Avalon Partners. Though he sees a rally as possible in the next few weeks, for now bad earnings news is taking its toll, he says, with results "consistent with expectations that this would be a horrible earnings season."

Morgan Keegan's chief technical strategist, John Wilson, said the partial recovery in Thursday's session was an encouraging sign. So far, stocks are staying above their lows of October and November despite plenty of worrying news.

While Apple Inc.'s (AAPL) quarterly results, released after the close of trading Wednesday, were positive, weak reports from Microsoft (MSFT) and Nokia (NOK) weighed on the market.

Market players were also disappointed by reports that U.S. home prices fell 8.7% year-over-year in November, U.S. housing starts fell 15.5% in December, and weekly initial jobless claims rose 62,000 to 589,000.

Investors continue to worry about the fate of the U.S. banking system, with some observers warning that major institutions, weighed down by losses, may need to be nationalized.

The primary factor weighing on the market this week is revelations about large losses at Bank of America (BAC) due to its acquisition of Merrill Lynch, says Brian Reynolds, chief market strategist at WJB Capital Group. Investors are realizing that the Federal Reserve, which appeared so aggressive last month, was in fact responding to serious stress in the banking system at the time.

"The Fed knew more than it was telling us," Reynolds says. "It was and is worse than we thought."

Bank of America (BAC) shares slid after reports that Merrill's former chief executive, John Thain, has mutually agreed to leave the company, effective immediately.

The confirmation of Timothy Geithner as treasury secretary by the full Senate "could help restore some confidence," Cardillo says. On Thursday, the Senate Finance Committee, on an 18 to 5 vote, approved Geithner's nomination and sent it to the full Senate, despite the New York Fed Chairman's underpayment of some $34,000 in taxes.

Geithner's confirmation "could help alleviate some of the fear of financial institutions being nationalized, which I think would be absolutely unacceptable for the market," Cardillo says.

Treasuries, faced with the prospect of a huge supply of newly issued government debt, were mixed in volatile trading Thursday. The yield on the 10-year note rose to 2.59%.

The dollar index was slightly lower at 85.51. Gold futures were higher at $860.30 per ounce. The British pound, which has been in a steep decline, fell on UK banking problems.

Crude oil futures was essentially flat at $43.54 per barrel in New York trading despite weekly data from the Energy Dept. showing a build-up in U.S. inventories.

Apple posted fiscal first quarter EPS of $1.78, vs. $1.76 one year earlier, on a 5.9% revenue rise. The company sees second-quarter revenue of $7.6 billion-$8 billion, and EPS of 90 cents-$1.00. Citigroup reportedly raised its price target on the stock to $147 and reiterated its buy rating.

Microsoft reported second-quarter EPS of 47 cents, vs. 50 cents one year earlier, as higher operating expenses offset a 2% revenue rise. The company said will cut 5,000 jobs over the next 18 months, including 1,400 jobs immediately. Microsoft added it could not offer guidance on the rest of the fiscal year.

Nokia posted fourth quarter EPS of €0.26, vs. €0.48 one year earlier, on a 20% sales drop. The company says its board will propose a dividend of €0.40 for 2008, vs. €0.53 in 2007.

Ebay (EBAY) posted fourth-quarter non-GAAP EP:S of 41 cents, vs. 45 cents one year earlier (29 cents vs. 39 cents GAAP EPS) on 6.6% lower revenue. The company sees 32 cents-34 cents first quarter non-GAAP EPS (21 cents-23 cents GAAP EPS) on $1.800 billion-$2.050 billion in revenue.

Meanwhile Intel (INTC) announced closure of older plants and some related job losses, while IBM Corp. (IBM) is reportedly looking to slash staffing despite posting solid results earlier in the week, says Action Economics.

Shares of Aflac Inc. (AFL) fell sharply after Morgan Stanley said the company's $7.9 billion exposure to hybrid securities issued by European financial institutions is an escalating concern.

Huntington Bancshares (HBAN) fell sharply after the company reported a fourth quarter loss of $1.20 per share vs. a 65 cent loss one year earlier.

Fifth Third Bancorp (FITB) shares also stumbled after the company posted a fourth-quarter loss per share of $3.82, vs. 3 cents EPS one year earlier.

In economic news Thursday, the U.S. FHFA home price index declined 1.8% in November after a 1.1% drop in October (revised from -1.1%). That's down 8.7% year-over-year. Weakness was broad-based across the nine regions, but paced by the Pacific, Mountain, and South Atlantic. Home price weakness was exacerbated by foreclosure sales, which spiked 81% last year with 3.1 million foreclosures, according to RealtyTrac.

Initial claims for unemployment insurance rose another 62,000 in the week ending Jan. 17, to 589,000. The consensus was a smaller rise, to 540,000. The number of people receiving benefits rose 97,000 in the week ending Jan. 10, to a new 25-year high of 4.607 million, holding the insured unemployment rate at 3.4%. The data may still include some make-up from the holidays, but mostly reflects the continued softening of the labor market.

"It should be noted that this data is for the employment survey week, which suggests another large drop in payrolls and a higher unemployment rate," wrote S&P senior economist Beth Ann Bovino, who called the release "another bad economic report to add to market woes."

Housing starts plunged to an annual rate of only 550,000 in December, down from an upwardly revised 651,000 in November. The consensus was for 610,000 starts. Most of the decline was in single-family starts, which plunged to 398,000 from 460,000. Multi-family starts were down to 145,000 from 175,000. Starts declined in all four Census regions, with the largest drop in the South. Permits dropped to 549,000 from 615,000. Housing completions fell to 1.018 from 1.071 million in November and 1.329 million last December.

The report provided a much weaker number than expected, although the seasonal factors in December make the data less relevant than for most months, notes S&P's Bovino.

Freddie Mac said 30-year fixed-rate mortgage (FRM) rates in the past week rose to an average 5.12% from 4.96% last week but were down from 5.48% in the same week a year ago.

Euro area industrial orders fell by 4.5% in November, following a downwardly revised decline of 5.7% in October and declines of 5.4% in September and 1.5% in August.

Among other companies in the news Thursday, SunTrust Banks (STI) posted a fourth-quarter loss of $1.08 per share, vs. EPS of one cent one year earlier. The firm cut its 54 cents quarterly dividend to 10 cents.

UnitedHealth Group (UNH) posted fourth-quarter EPS of 60 cents, vs. 92 cents, despite a 9.4% revenue rise.

Southwest Airlines (LUV) posted better-than-expected fourth-quarter non-GAAP EPS of 8 cents, vs. 12 cents one year earlier, as higher operating expenses offset a 9.7% operating revenue rise. Wall Street was looking for 5 cents in the current quarter.

Lockheed Martin (LMT) posted fourth quarter earnings per share of $2.05, vs. $1.89 one year earlier, on a 3.1% revenue rise. The company raised its 2009 revenue forecast, but lowered earnings estimates.

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