Stock rally spoiled by subprime, oil

NEW YORK (CNNMoney.com) -- Stocks suffered a steep selloff Tuesday afternoon after a bold start with the Dow industrials falling nearly 150 points on more subprime mortgage woes and record-high oil prices.

The Dow Jones industrial average (down 120.39 to 13,237.92, Charts) tumbled 146 points, or 1.1 percent based on early tallies, after climbing by as much as 138 points during the session.

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The broader S&P 500 (down 19.45 to 1,454.46, Charts) fell nearly 1.3 percent while the tech-fueled Nasdaq Composite index (down 37.01 to 2,546.27, Charts) lost 1.4 percent.

Oil prices finished at an all-time high, climbing $1.38 to $78.21 a barrel on the New York Mercantile Exchange.

Bonds prices climbed as investors sought shelter in Treasurys, lowering the yield on the 10-year note to 4.76 percent down from 4.8 percent late Monday.

The dollar edged higher versus the euro and was lower against the yen. COMEX gold for December gained $2.70 to $679.30 an ounce.

Here's what was moving before the close:

After a bullish start to the session, stocks pared gains as new subprime mortgage market concerns emerged.

Mortgage lender American Home Mortgage said Tuesday afternoon it was unable to borrow and that it was considering liquidating its assets, marking the latest woe in the credit market.

The news sent shares of American Home Mortgage (down $9.36 to $1.11, Charts) plummeting 89 percent and renewed worries on Wall Street about health of the mortgage and larger credit markets.

"The concern is when will the next shoe drop," said Art Hogan, chief market analyst, Jefferies & Co. "The implication is not this one particular company, but what else is out there."

Investors around the world have been rattled by signs of tougher conditions in credit markets, since tighter credit could raise the cost of borrowing for companies, hurting corporate earnings. This is likely to slow the buyout boom, which has helped prop up stock prices.

Oil prices, which climbed to finish at record highs, also helped pressure stocks.

"We're printing up a new high on the price of oil - at some juncture that had to have an effect," said Hogan.

Better-than expected earnings from Sun Microsystems (up $0.21 to $5.10, Charts, Fortune 500) and embattled automaker General Motors pushed up stocks at the start. GM (down $0.12 to $32.49, Charts, Fortune 500) posted its first profitable quarter in over two years, while Sun, which makes computer servers, reported better-than expected earnings after the closing bell Monday.

Wall Street also received some relatively encouraging numbers from the economic front Tuesday.

In the June personal spending and income report, the so-called core PCE deflator, a favored inflation gauge of the Federal Reserve, came in lower than expected and within the central bank's comfort range.

And consumer confidence climbed to its highest level in nearly six years, the Conference Board reported Tuesday, handily beating forecasts.

Two troubling areas, however, were a surprise decline in construction spending in June, and a report that revealed Midwest business activity grew at a slower-than-expected pace in July.

In major U.S. corporate news, Dow Jones' Bancroft family members, which own a 32 percent stake in the Wall Street Journal publisher, agreed to back News Corp.'s (down $0.14 to $22.70, Charts, Fortune 500) $5 billion offer, the Journal reported.

Dow Jones (up $5.77 to $57.33, Charts) shares climbed over 11 percent on the New York Stock Exchange.

Billionaire investor Nelson Peltz said Monday that his restaurant company, Triarc (down $0.17 to $14.21, Charts), would be prepared to offer $37 to $41 a share for struggling rival Wendy's International (up $1.38 to $35.07, Charts).

Shares of British drugmaker GlaxoSmithKline (up $1.73 to $51.16, Charts) gained over 3 percent after a Food and Drug Administration advisory panel recommended that Glaxo's best-selling diabetes drug, Avandia, remain on the market despite an analysis showing links to increased risk of heart attack.

Market breadth was negative. Losers beat winners by more than 5 to 3 on volume of 2.01 billion shares on the New York Stock Exchange. Decliners topped losers by 3 to 2 on volume of 2.69 billion shares on the Nasdaq.