NEW YORK (CNN/Money) - U.S. stocks managed a decent recovery by the close Monday, with blue chips narrowing losses and the Nasdaq hitting breakeven, after an early slide on U.S. Airways' bankruptcy filing and speculation about the Federal Reserve's upcoming policy-setting meeting Tuesday.

The Dow Jones industrial average fell 56.56 to 8,688.89, cutting its earlier loss in half. The Nasdaq composite gained 0.72 to 1,306.84; the composite was down almost 20 points earlier in the session. The Standard & Poor's 500 index declined 4.86 to end the day at 903.58.

"Last week, the market rallied on hopes that the Fed would cut rates, but today (Monday), people weren't so sure. It created a lot of confusion," Kenneth Polcari, managing director at Polcari/Weicker told CNNfn's Street Sweep. "People want to get back to the fundamentals, but they keep getting distracted."

One of the big factors impacting the market was anticipation regarding the Federal Reserve's policy-setting meeting Tuesday. While most signs point to the Fed leaving interest rates unchanged at a 40-year low of 1.75 percent, some still speculate that the recent stock declines and slowdown in the economic recovery could spur a cut.

"The Fed decision may be a non-factor in terms of stock action," Scotty George, chief investment strategist at Corinthian Partners Asset Management. "You can lead a horse to water, but you can't make him invest."

In addition to the Fed's announcement, Tuesday also brings the July report on retail sales from the Department of Commerce. The widely-watched index is seen as a significant barometer of consumer spending patterns. The index is expected to rise slightly to 1.2 percent from 1.1 percent the previous month. Excluding the volatile gas and food components, the index is forecast to have declined to a rise of 0.3 percent from a rise of 0.4 percent in the previous month.

Reminding investors of the economic uncertainty that has hurt markets for months, US Airways Group (U: unchanged at $2.45, Research, Estimates) filed for bankruptcy Sunday, following news last week that it had previously hired bankruptcy lawyers. The company said it has secured $500 million in debtor financing from a group led by a number of banks. It said that it will continue to operate and pay its employees while it tries to restructure and emerge from bankruptcy by early 2003.

The company, like many airlines, was hit hard by the decline in air travel following the attacks against New York and Washington, D.C., on Sept. 11. The stock was not open for trade during the regular session, but traded down $1.95 to 50 cents after the close.

The Wall Street Journal speculates that UAL (UAL: down $1.40 to $3.80, Research, Estimates) could follow US Airways into bankruptcy, due to the fact that UAL's campaign for a $1.8 billion federal loan guarantee is running into resistance from federal regulators and competitors. The weakness in the sector knocked the Dow transportation index down about 59 points, or 2.5 percent, to around 2,292.

"The bankruptcy filing and other stock stories are weighing on us a little, and you've got the Federal Reserve meeting and the CEOs signing off on the books hanging over us, but mostly you're seeing stocks a little skittishness after four days of gains last week," said Bryan Piskorowski, market analyst at Prudential Financial.

Diversified conglomerate and Dow component 3M (MMM: down $0.52 to $125.63, Research, Estimates) said it expects 2002 earnings of $5.15-to-$5.30 per share, including one-time items. The consensus of analysts surveyed by First Call is $5.26.

The Dow retailers, Wal-Mart Stores (WMT: down $0.79 to $48.41, Research, Estimates) and Home Depot (HD: down $1.59 to $26.70, Research, Estimates), both declined on fears about how the economic slowdown may impact consumer spending, analysts said. Wal-Mart fell despite saying that August sales were on track to meet estimates.

Wal-Mart is expected to report quarterly results Tuesday morning. The company is forecast to have earned 45 cents per share, according to First Call, an improvement on the 37 cents per share earned in the year-earlier period.

The semiconductor sector also was under pressure following a number of negative analyst notes.

Salomon Smith Barney cut its sales estimates on No. 1 chipmaker Intel (INTC: down $0.33 to $17.53, Research, Estimates), citing the somewhat sluggish pickup in PC component sales so far in the third quarter. The firm has cut third-quarter earnings-per-share estimates to 12 cents from 14 cents and revenue to $6.44 billion from $6.78 billion. The firm also cut its price target to $25 from $27.

Credit Suisse First Boston cut its earnings-per-share estimates on Applied Materials (AMAT: down $0.28 to $13.58, Research, Estimates), saying that the revenue cycle for the semiconductor equipment industry will be "significantly muted compared to the 2000 cycle." On Tuesday, after the bell, Applied Materials is expected to report earnings per share of 5 cents in its most recent quarter, down from 8 cents a share a year earlier.

In addition, as of Monday, only 147 executives had certified their recent financial statements with the Securities and Exchange Commission, according to the commission's Web site checklist. About 700 companies have until Wednesday to certify their results and there is some fear about the possibility of the potential for restatements.

"You have pretty light volume ahead of the Fed meeting. You also had the Dow have one of its best weeks in 15 years last week, so you're going to see some pullback from that," said Matt Ruane, head of listed trading at Gerard Klauer Mattison. "Airlines are down again and it's pressuring the broader market, particularly the Dow. US Airways' filing wasn't a surprise but it still sets a negative tone."

Treasury prices rose, pushing the 10-year note yield down to 4.21 percent. The dollar fell versus the yen and euro. Light crude oil futures rose 78 cents to $27.15 a barrel. Gold was a little lower in U.S. trade.

Market breadth was negative in extremely light volume. On the New York Stock Exchange, decliners topped advancers nearly 8-to-7 as 1.02 billion shares traded. On the Nasdaq, losers edged winners as 1.05 billion shares changed hands; it was the Nasdaq's lightest volume day of 2002.