Stocks turn lower

NEW YORK (CNNMoney.com) -- Stocks turned lower Thursday morning, erasing early gains sparked by a $2 billion investment in Countrywide Financial after its CEO made comments that revived worries about the turmoil in the credit and mortgage markets.

The Dow Jones industrial average (down 34.71 to 13,201.42, Charts) lost 0.3 percent nearly 3 hours into the session, while the broader S&P 500 (down 5.01 to 1,459.06, Charts) index fell 0.4. The tech-fueled Nasdaq Composite (down 13.66 to 2,539.14, Charts) gave up 0.6 percent.

Treasury prices rose, erasing early declines. The dollar rose versus the yen and fell versus the euro. Oil prices were barely changed and gold prices turned lower.

The major stock gauges posted slim gains at the open Thursday morning as investors welcomed news that Bank of America (up $0.16 to $51.81, Charts, Fortune 500) is investing $2 billion in troubled mortgage lender Countrywide Financial (up $1.00 to $22.83, Charts, Fortune 500).

Regardless, ratings agency Moody's said it could still cut the lender's debt rating into junk territory.

And Countrywide's CEO reportedly gave a television interview in which he said there is still a big liquidity problem and that the housing slump could lead the United States into a recession.

All of which caused stocks to give up early gains and turn lower.

Also adding to worries: news that the Federal Reserve, on Thursday, injected $17.5 billion in temporary reserves into the banking system, in three installments.

Stocks have been in recovery mode the last week after a tough month, marred by worries about the impact of the tightening credit market on equities and the economy. Investors have taken comfort in corporate takeover talk, big infusions of cash from central banks around the world and bets that the Federal Reserve will cut the fed funds rate - which affects consumer loans - at its policy meeting next month.

Last week, the Fed cut the largely symbolic discount rate - the rate at which banks borrow directly from the central bank. On Wednesday, four major banks, led by Bank of America and Citigroup, said that they had taken advantage of this by borrowing $500 million each from the Fed.

Separately, the Congressional Budget Office said Thursday that the U.S. budget deficit will shrink more than expected this year, due to the strong economy. Looking forward, the non-partisan agency acknowledged uncertainty because of the housing market, but said that the economic outlook was sound.

In corporate news, the sale of Home Depot's wholesale supply division, due to close Thursday, could be in trouble, according to reports. Shares of Dow component Home Depot (down $0.92 to $33.85, Charts, Fortune 500) fell 2 percent.

Children's Place Retail Stores (down $5.64 to $27.38, Charts) slumped 19 percent after posting a preliminary net second-quarter loss that almost doubled from a year ago, cutting its 2007 outlook and saying that its full financial filings could be delayed. The retailer also said its licensing deal with Walt Disney could be in trouble.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by a narrow margin on volume of 630 million shares. On the Nasdaq, decliners beat advancers three to two on volume of 790 million shares.

Treasury prices rose, lowering the benchmark 10-year note yield to 4.62 percent from 4.63 percent late Wednesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar slipped versus the euro and rose versus the yen.

U.S. light crude oil for October delivery rose 24 cents to $69.50 a barrel on the New York Mercantile Exchange.

COMEX gold for December delivery fell 20 cents to $668.50 an ounce.

A morning report showed that the number of Americans filing new claims for unemployment fell last week by a smaller-than-expected 2,000 to 322,000.

Meanwhile, mortgage lenders cut 18,000 jobs this month, reflecting the fallout from the subprime lending market - mortgages given to consumers with flawed credit.