New recession alarms sends futures lower

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NEW YORK (CNNMoney.com) -- New recession fears because of unexpected weakness in the U.S. service sector sent stock futures sharply lower just ahead of the market open Tuesday.

Nasdaq and S&P futures had been pointing to a modestly lower open ahead of a report from the Institute of Supply Management that showed the reading on business activity outside of manufacturing plunged to 41.9 from 54.4, ending nearly five years of growth in the sector.

Economists had been forecasting the index would slip to only 53. Any reading above 50 indicates growth in the sector, while a reading below 50 shows businesses pulling back.

The report covers industries such as retail, transportation and health care and includes some sectors that have been hard hit by the problems in the economy, including finance, real estate and construction. The reading was the latest sign to suggest that the U.S. economy is either on the brink of a recession or has already fallen into one.

Stocks slumped Monday amid downgrades of several financial sector stocks and as investors pulled back from a big rally.

Investors may stay on hold Tuesday as they await Super Tuesday primary results, when voters in 24 states go to the polls in voting that could help determine the Republican and Democratic presidential nominees.

In earnings news, Rupert Murdoch's News Corp. (NWS, Fortune 500) posted results late Monday about in line with analysts' estimates. Murdoch also said the company is not considering a bid for Internet giant Yahoo (YHOO, Fortune 500). Microsoft (MSFT, Fortune 500) has offered Yahoo $45 billion in an unsolicited bid. Yahoo's board has yet to respond.

Yahoo shares were downgraded to "hold" from "buy" late Monday by Soleil and early Tuesday by Bank of America. Shares of Yahoo gained another 3.4% in Monday trading, taking them to $29.33, just below the $31 offer price from Microsoft.

Medical device maker Boston Scientific (BSX, Fortune 500) also reported results after the market close Monday. The company said it swung to a net loss of $458 million in the latest quarter, but earnings excluding items beat forecasts and the company raised first quarter guidance, which lifted its shares as much as 7% in after-hours trading.

Walt Disney is due to report quarterly results after the market close.

Credit rating agency Moody's (MCO) is considering a new way of rating mortgage-backed securities other sometimes-volatile structured finance vehicles, a move seen as an effort to rehabilitate its reputation by acknowledging that the system it used to rate billions of dollars was flawed. Shares of Moody's gained nearly 1% in after-hours trading following the announcement.

World markets took a cue from Wall Street's weak session. Asian stocks mostly finished lower, as the Australian central bank raised interest rates and Toyota Motor (TM) reported one of its smallest profit gains in years. The U.S. is the largest market for its vehicles.

European shares slipped in morning trading. BP (BP) reported a smaller than forecast 53% rise in earnings.