NEW YORK (CNN/Money) - U.S. stocks recovered from steep losses to close modestly lower Thursday, but the nervousness over the war in Iraq that has gripped the market for weeks now remained.

The Dow Jones industrial average (down 28.43 to 8201.45, Charts), the Nasdaq composite (down 3.20 to 1384.25, Charts), and the S&P 500 index (Charts), though lower on the day, came back from earlier losses of about 1 percent.

Bonds closed little changed and gold sold off, while oil prices continued to rise.

"The Nasdaq is kind of bouncing between support levels. Some buyers have surfaced, with people picking out certain issues that they want to be in, but there's no rush to buy," said Hedi Reynolds, head of Nasdaq trading at Morgan Keegan.

"It's still going to be very day-to-day," she added. "I think everybody is still really focused on everything that is happening in the war. It's a very news driven market."

Stocks have fallen for 3 out of 4 sessions this week on increasing evidence that the war will last longer than expected and also hurt the already struggling U.S. economy. The declines mark a reversal from the previous week's gains, fueled then by optimism that war would be swift. But even within the selling this week, traders have jumped in to grab shares here and there, sometimes on news and rumors, sometimes on bargain hunting. Thursday's action was no exception.

Investors started the day nervous on the heels of a Washington Post article quoting military officers who said they expect the military campaign to last months, not weeks, and to require many more troops and a lot more equipment to succeed.

Markets found some comfort in a late morning joint press conference by British Prime Minister Tony Blair and President Bush in which both reiterated their commitment to the war and said coalition forces were making progress. Blair also pushed for the United Nations to revive its Iraqi humanitarian aid program and for the United Nations to be more actively involved in a rebuilding of Iraq once war ends.

"Blair is trying to put people's perspective in the right place," said Donald Selkin, director of research at Joseph Stevens. "Maybe they expected too much in the first week. He's saying that we are making progress and we are going to try and work with the U.N., and that reassures people."

Although the economic news has been largely overshadowed by the war, a few interesting economic reports are expected early Friday. Personal income and personal spending are both forecast to show modest declines in February from the previous month, while the revision of the University of Michigan's consumer sentiment index is expected to remain at 75.0, according to Briefing.com.

War has been cited as the one big uncertainty plaguing the U.S. economy, its clouding effect being so powerful that even the Federal Reserve has found it impossible to determine what the near-term risks are to the economy.

A prolonged war would not only be costly in terms of funds spent to finance the campaign to topple Iraqi President Saddam Hussein and rebuild his country, but it also could cost the economy a much needed recovery as businesses and consumers put their spending on hold until the conflict is resolved.

"Right now business stinks, consumer confidence is down, the travel industry is suffering and the economic reports haven't been good and any economic recovery is going to be linked to the war," Selkin added. "There haven't been too many first-quarter negative pre-announcements, but I'm still worried about corporate profits in the first quarter."

The slowdown in spending and exports has already cost the U.S. economy, with gross domestic product in the fourth quarter showing minimal growth of 1.4 percent, after growing 4 percent in the third-quarter.

"The longer the war goes on, the longer confidence levels stay low and businesses and individuals don't spend," Selkin added.

Adding to this, the struggling labor market has shown few signs of recovery. Weekly jobless claims last week dipped to 402,000 from a revised 427,000 the prior week. While this was a bigger dip than was expected, claims remained stubbornly above the key 400,000 level, which economists see as a benchmark for a deteriorating labor market.

With all of this in mind, traders remained glued to their TV screens Thursday morning, watching the latest developments in Iraq and selling stocks in the process.

Market breadth was narrowly positive. On the New York Stock Exchange, advancers beat decliners 9 to 7 as 1.20 billion shares changed hands. On the Nasdaq, winners just barely edged losers as 1.40 billion shares traded.

In corporate news, shares of communications chipmaker Broadcom (BRCM: down $2.49 to $12.91, Research, Estimates) fell 16 percent and was the Nasdaq's third most-active issue after Morgan Stanley downgraded the stock to "equal weight" from "overweight" citing concerns about the company's performance amid recently announced management changes.

Breadth on the Dow improved as the day wore on. The average's two industrial cyclicals were among its biggest losers for the second session in a row, with Alcoa (AA: down $0.55 to $20.23, Research, Estimates) and International Paper (IP: down $0.98 to $34.65, Research, Estimates) each losing 2 percent.

But shares of Dow stock McDonald's (MCD: up $0.27 to $14.50, Research, Estimates) gained nearly 2 percent on published reports that the fast-food retailer is looking to sell some of its partner brands, including Boston Market, in what is being seen as a positive move on the part of the new chief executive.

U.S. Treasury bonds closed little changed. The benchmark 10-year note rose 1/32 of a point in price, its yield at 3.92 percent. The dollar recovered some of its earlier losses versus the yen and the euro.

The price of oil continued to climb after Nigerian tribal clashes added to the market's existing supply concerns stemming from the likelihood of a protracted military campaign in Iraq. Light sweet crude futures jumped $1.82 to $30.45 a barrel in New York. But gold turned negative after a morning rally, losing $1.70 to trade at $329.30 an ounce in New York.