Stocks cut losses

Recession Watch 2008

• Consumer confidence at 5-year low
• Musical chairs at the mall
• U.S. ready to act to calm markets - Paulson
• Bush tax cuts center stage in Congress
• Slower growth, but no recession - forecast

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Major markets close in the red on Intel, Citi news, while the Nasdaq stages a late-session recovery. Play video

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NEW YORK (CNNMoney.com) -- Blue chips fell Tuesday, but the broader market cut losses by the close after a tough session influenced by questions about Citigroup and Intel's profit forecasts - and dour comments on the economy from a slew of Fed officials.

The Dow Jones industrial average (INDU) lost about 0.4%. The broader Standard & Poor's 500 (SPX) index lost 0.3% and the Nasdaq composite (COMP) was little changed.

All three major gauges had fallen more through the mid afternoon, with the Dow at one point down about 200 points. But stocks cut losses near the close, after reports that Ambac Financial is nearing a bailout package, and some upbeat comments from Cisco's CEO.

Wednesday brings a bevy of economic reports, including the monthly report on private sector employment from payroll services firm ADP, which will be closely watched ahead of Friday's broader jobs report. Also on Wednesday, reports are due on factory orders and the Institute for Supply Management's reading on the services sector of the economy. The fed's periodic beige book review of the economy is due in the afternoon.

Citigroup (C, Fortune 500) slumped 4.3% to a nine-year low after Merrill Lynch cut its full-year earnings forecast for the company. Merrill said the bank could take another $18 billion in writedowns related to bad mortgage bets, according to published reports.

Separately, the CEO of Dubai International said Citigroup may need additional funding because of its growing losses, Bloomberg reported.

The Citigroup news sparked worries about more writedowns in the troubled financial sector. At the same time, Intel warned about its profits, causing a selloff in the chip sector.

"The Citigroup news came out, coupled with the Intel news and the two combined are just really continuing the trend we've seen lately," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "It's more bad news for the market."

But stocks got some good news in the afternoon following more reports that bond insurer Ambac could be moving closer to a bailout. Additionally, Cisco's CEO said in a presentation that he's more comfortable with the company's long-term guidance than he was after the company's last earnings report, according to news reports.

Fed officials sound the alarm Dallas Fed Bank President Richard Fisher said that inflation is now a greater threat than slowing economic growth.

In comments prepared for a speech in London, Fisher said that recent reports haven't been encouraging, and pricing pressure could keep rising even as the economy slows - a much-dreaded environment known as stagflation. Fisher, who is a voting member of the Fed's policy setting committee, indicated that he would discourage the central bank from continuing to cut interest rates.

Yet, separately, Federal Reserve Governor Frederic Mishkin said that the economy was facing significant downside risks as a result of the slowdown in housing. His comments implied that further rate cuts are on tap.

The Fed has cut interest rates steadily since September in an attempt to shore up the economy amid the credit and housing market crises. Investors are betting that the central bank will cut rates again at the next scheduled meeting on Mar. 18 by three-quarters of a percentage point.

Earlier, Federal Reserve Chairman Ben Bernanke said that foreclosures and mortgage delinquencies are going to continue to rise for some time. The Fed chief, in prepared comments for a speech to U.S. community bankers, also said that home prices are going to keep falling. (Full story).

Worries about the housing market fallout, along with the credit crisis, have weighed on stocks for months, with investors now betting that the United States is in a recession or heading towards one.

In prepared comments for a speech before the Senate Banking Committee, Fed Vice Chairman Donald Kohn said that the U.S. banking system faces some challenges, but remains in "sound overall condition."

Kohn's speech was part of a committee hearing on the state of the banking industry and how it has contributed to the subprime crisis and the economic slowdown. (Full story).

On the move Mortgage lenders tumbled for a second session. Thornburg Mortgage (TMA) was downgraded to "sell" from "hold" at Citi Investment Research. Thornburg has been under pressure lately as it has faced a wave of margin calls that it is struggling to meet.

Financial names like Washington Mutual (WM, Fortune 500), Bank of America (BAC, Fortune 500) and Countrywide Financial (CFC, Fortune 500) also slipped.

Tech leader Intel (INTC, Fortune 500) cut its fiscal first-quarter profit forecast. The chipmaker said gross margins - a key measure of profitability - won't meet previous forecasts due to a big drop in prices for memory chips. Intel shares slipped through most of the session, but managed to recover near the close.

Other big techs managed gains, including IBM (IBM, Fortune 500), Hewlett-Packard (HPQ, Fortune 500) and Microsoft (MSFT, Fortune 500).

Market breadth was negative. On the New York Stock Exchange, losers beat winners two to one on volume of nearly 1.79 billion shares. On the Nasdaq, decliners topped advancers nearly three to two on volume of 2.7 billion shares.

Other markets U.S. light crude oil for April delivery fell $2.93 to settle at $99.52 a barrel on the New York Mercantile Exchange. The active-month contract had touched a new trading high of $103.05 Monday in electronic trading.

Gold prices retreated after heading closer to the $1,000 an ounce milestone. COMEX gold for April delivery fell $17.90 to settle at $966.30 an ounce.

Treasury prices tanked, raising the yield on the benchmark 10-year note to 3.61% from 3.53% late Monday. Bond prices and yields move in opposite directions.

In currency trading, the dollar stood near an all-time low versus the euro. The greenback also slipped against the yen.