Dow slump extends to 3rd day

Stocks fall as investors worry about the status of the global recovery.

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By Ben Rooney, staff writer

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NEW YORK( -- Stocks closed sharply lower Thursday as optimism about a global economic recovery was tempered by mixed data and a potential downgrade of the United Kingdom's credit rating.

The Dow Jones industrial average (INDU), fell 130 points, or 1.5%, marking the third straight loss for the blue-chip measure. The S&P 500 (SPX) index dropped 15 points to close 1.7% lower and the Nasdaq composite (COMP) lost 1.9%.

Oil prices fell 1.6% but remained near 6-month highs. Bond prices fell, while the dollar lost ground against the euro and the pound.

The tone on Wall Street turned bleak late Wednesday after the Federal Reserve trimmed its 2009 economic growth targets and raised its unemployment forecast. The gloom was exacerbated Wednesday morning after ratings agency Standard & Poor's lowered its outlook for the U.K.

Thursday's selloff gained momentum as jobless data and a worse-than-expected regional manufacturing report raised doubts about the prospects for an economic recovery later in the year.

Stocks have gained some 30% over the last few months amid signs the pace of the recession has slowed. But Wall Street has become bearish in recent sessions as investors look for more concrete signs of economic recovery.

Todd Salamone, director of trading at Schaffer's Investment Research, said the market is no longer impressed with the "less bad" economic data that helped lift stocks off the 12-year lows hit March 9.

"We're in a period now where the market gets less of a positive surprise from less bad economic news," he said. "Unless we get even better less bad numbers, it may be difficult for the market to rally."

With economic jitters returning to the forefront, a closely watched gauge of investor fear, the CBOE Volatility Index, or VIX, rose to 32.7 after falling below 30 for the first time since September earlier this week.

No major economic reports or corporate results are due Friday. U.S. trading is expected to be quiet Friday with many market participants absent ahead of the Memorial Day holiday. The bond market will close early at 2 p.m. ET.

U.K. rating: Standard & Poor's affirmed the United Kingdom's top-tier credit rating but lowered its outlook for the country to "negative" from "stable."

S&P said its revision was based on the possibility that the U.K.'s debt burden could reach 100% of its gross domestic product, despite the British government's "further fiscal tightening."

The news raised concerns that other major economies that have borrowed heavily to fund economic stimulus efforts, including the United States, could face similar downgrades.

"The downgrade of Great Britain by S&P certainly damped enthusiasm," said Peter Cardillo, chief market economist at Avalon Partners.

Economy: The Labor Department reported that initial jobless claims declined by 12,000 in the week ending May 16.

The number of people filing for first-time jobless benefits totaled 631,000 last week, slightly more than expected. But those filing claims on an ongoing basis rose to 6.6 million, an all-time high.

Separately, the Conference Board's reading of leading economic indicators, which predicts economic conditions six to nine months in the future, rose 1% in April -- slightly better than the 0.8% analysts expected.

The Federal Reserve Bank of Philadelphia said its index of manufacturing activity in the mid-Atlantic region improved to negative 22.6 in May from negative 24.4 in April. Economists surveyed by had expected the index to improve to negative 18.

"We're starting to see numbers that aren't quite as damaging," said Ron Kiddoo, chief investment officer at Cozad Asset Management "But I don't think the market will trade to the upside until you start to see real growth."

Companies: Auto finance firm GMAC is poised to receive a second bailout from the Treasury, according to the Detroit News. The newspaper said the company is due to receive $7.5 billion more in aid.

In other auto news, the United Auto Workers union reached a deal Thursday with the Treasury Department and General Motors (GM, Fortune 500) on changing its labor contract with the troubled automaker. The accord removes a major hurdle in GM's bid to avoid bankruptcy. GM shares rose more than 30%.

In one of the first Nasdaq initial public offerings of the year, OpenTable, which operates a restaurant reservation system, raised $60 million, one of the deal's underwriters told Reuters. The company priced its shares at $20 each, which was higher than expected, and rose 59% to $31.89.

Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.36% from 3.19% Wednesday. Treasury prices and yields move in opposite directions.

The U.S. government announced more than $100 billion worth of new issuance Wednesday, raising concerns that supply will weigh on bond prices.

Other markets: Investors around the world were in a downbeat mood. In Asia, most shares finished lower. Major indexes in Europe tumbled about 2.7%.

In currency trading, the dollar fell versus major international currencies, including the euro, the yen and the British pound.

Oil slipped from its six-month high, but still continued to trade above $60 a barrel. The price of oil dropped 99 cents to settle at $61.05 a barrel.

COMEX gold for June delivery rose $13.80 to settle at $951.20 an ounce. To top of page

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