AIG takes $11B writedown, swings to loss

The insurer says 'significant, rapid declines' in the value of mortgage backed investments contributed to the loss.

American International Group says it swung to a hefty loss for the fourth quarter as bad credit hurt the insurer's investment portfolio.

The New York-based insurer said Thursday it posted a loss of $5.29 billion, or $2.08 per share, in the fourth quarter, compared with profit of $3.44 billion, or $1.31 per share, in the fourth quarter of 2006.

A portfolio of risky credit contracts lost $11.12 billion in value, and AIG also incurred more than $3 billion in investment losses. The company cited "significant, rapid declines" in the value of investments tied to home loans.

U.S. Stocks Fall After GDP Trails Forecast, Jobless Claims Rise

U.S. stocks dropped for a second day after the economy grew less than forecast, jobless claims jumped and Federal Reserve Chairman Ben S. Bernanke said some smaller banks will probably collapse.

JPMorgan Chase & Co. led financial shares to their first drop in five days after Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their profit estimates. The Standard & Poor's 500 Financials Index extended its decline after Bernanke said that in many cases small banks need to raise more capital. Sprint Nextel Corp., the third-biggest U.S. wireless carrier, retreated to a five-year low after reporting a record $29.5 billion loss.

The S&P 500 declined 12.97 points, or 0.9 percent, to 1,367.05 at 11:20 a.m. in New York. The Dow Jones Industrial Average decreased 126.34, or 1 percent, to 12,567.94. The Nasdaq Composite Index lost 19.68, or 0.8 percent, to 2,334.1. About seven stocks fell for every two that rose on the New York Stock Exchange.

We're still seeing the fallout from housing, and the credit crunch is still unfolding, said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities. It seems like every credit rock you turn over has something crawl out from underneath it. That makes us relatively defensive.

The U.S. economy in the fourth quarter grew at an annual rate of 0.6 percent, less than forecast and reflecting reduced estimates for spending and construction. Initial jobless claims increased by 19,000 to 373,000 in the week ended Feb. 23, the Labor Department said. Total benefit rolls rose for a second straight week to the highest since October 2005.

Profit Slump

The S&P 500 has dropped 6.9 percent this year on concern the collapse of subprime mortgages and a slowdown in the world's largest economy will drag down profits. Profit slumped 16 percent on average at the 440 members of the S&P 500 that reported fourth-quarter results so far, according to Bloomberg data. During the first quarter, earnings will decline 1.6 percent, according to the average analyst estimate.

Markets tend to bottom out fairly slowly, Bruce McCain, head of investment strategy at Key Private Bank in Cleveland, which manages $30 billion, said in a Bloomberg Television interview. We don't want to be too quick to commit money only to see markets roll over with a wave of bad news. We're much more optimistic about the economy later this year.

Sprint Nextel fell 72 cents to $8.23 on the NYSE. The company's per-share loss was $10.36 as customers defected and it wrote down the value of the purchase of Nextel Communications Inc. Sprint also eliminated its dividend.

Goldman, Merrill

JPMorgan lost $1.45 to $42.96. Goldman Sachs and Merrill Lynch reduce their forecasts on expectations of writedowns in the value of its home-equity loans.

Financial shares lost 2.6 percent, the most among 10 industries in the S&P 500. Bernanke, testifying before Congress about the state of the economy, said there probably will be some bank failures. Large banks will likely be spared because they have enough cash to stay solvent, he added.

American International Group Inc. fell on speculation the insurer may report its first quarterly loss in five years. AIG, the world's biggest insurer, fell $1.32 to $50.93. Chief Executive Officer Martin Sullivan, who has failed to win the confidence of shareholders since he succeeded Maurice Hank Greenberg in 2005, may report a fourth-quarter loss of $1.20 a share, according to Goldman Sachs analyst Tom Cholnoky.

`Disproportionately Shared'

The problem in the banking industry is disproportionately shared by the largest names, said Matthew DiFilippo, director of research at Stewart Capital Advisors, which manages $1 billion in Indiana, Pennsylvania.

Most U.S. stocks retreated yesterday as a slump in utilities and drugmakers offset speculation Federal Reserve Chairman Ben S. Bernanke will cut interest rates to avert a recession.

Mylan Inc. sank $1.09 to $12.06. The company said it had a quarterly loss of $1.38 billion on expenses from its $6.9 billion purchase of Merck KGaA's generics unit.

Thornburg Mortgage Inc. tumbled $1.93, or 17 percent, to $9.61. The mortgage lender that specializes in adjustable-rate loans said it may have to sell assets to meet lenders' demands for increased collateral as prices of mortgage-backed bonds extended declines this month.

Thornburg has already met $300 million of margin calls, depleting its available cash and reducing its ability to meet future demands for more collateral, it said in a filing with the Securities and Exchange Commission today.

The gain in gross domestic product from October through December matched the government's advance estimate issued last month and followed a 4.9 percent third-quarter pace, according to revised figures issued today by the Commerce Department in Washington. The median estimate in a Bloomberg News survey of economists projected a 0.8 percent increase.

U.S. Stocks Rise on Rate-Cut Speculation, Fannie, Freddie Caps

U.S. stocks rose for a fourth day after Federal Reserve Chairman Ben S. Bernanke said policy makers will act quickly to boost growth and regulators allowed Fannie Mae and Freddie Mac to buy more mortgages.

Fannie Mae and Freddie Mac, the biggest sources of financing for U.S. home loans, rallied and led the market's rebound after the government removed restrictions on the size of their portfolios. Citigroup Inc., American Express Co. and General Motors Corp. led gains in the Dow Jones Industrial Average, which fell earlier after orders for durable goods dropped more than forecast in January.

The Standard & Poor's 500 Index climbed 4 points, or 0.3 percent, to 1,385.29 at 11:27 a.m. in New York, capping its longest stretch of gains this year. The Dow average added 54.63 points, or 0.4 percent, to 12,739.55, rebounding from a loss of 0.6 percent. The Nasdaq Composite Index rose 13.24, or 0.6 percent, to 2,358.23. About three stocks gained for every two that fell on the New York Stock Exchange.

If liquidity is restored to the mortgage market it has a good chance of restoring liquidity to the rest of the credit markets, said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. in New York. There's a lot of companies having a tough time accessing capital because the banks are at the center of the credit crisis.

Bernanke's comments prompted traders to increase bets on larger rate cuts. He told Congress that the Fed will act in a timely manner to insure against downside risks to the economy. Stocks fell earlier after the Commerce Department said bookings for products meant to last several years decreased 5.3 percent in January.

Fannie, Freddie

Fannie Mae rose $2.82, or 10 percent, to $29.79. Freddie Mac climbed $1.91, or 7.6 percent, to $27.12. The limits on the size of the companies' mortgage portfolios, imposed after accounting errors at the government-chartered companies, will be lifted on March 1, according to a statement sent by e-mail today from the Office of Federal Housing Enterprise Oversight.

Citigroup Inc., the biggest U.S. bank, climbed 44 cents to $25.39. Goldman Sachs Group Inc., the largest securities firm, rallied $3.55 to $176.25.

Traders boosted bets that the Fed will cut interest rates by 0.75 percentage point to 2.25 percent by the central bank's March meeting. Fed funds futures trading shows 12 percent odds of a three-quarter point cut, compared with no chance yesterday. The remaining bets are for a half-point reduction to 2.5 percent.

`Hit the Ground Running'

The Fed has really hit the ground running in 2008 trying to keep this going, but it looks as though they're pushing on a string, Peter Sorrentino, who helps manage $15 billion as senior portfolio manager at Huntington Asset Advisors in Cincinnati, said in an interview on Bloomberg Television. The capital flows around the globe are overwhelming what the Fed is able to do at this juncture.

Autodesk Inc. dropped $6.36 to $32.74. The software maker reported fourth-quarter profit, excluding compensation and acquisition costs, of 52 cents a share. That missed the 54-cent average of analysts' estimates.

Amgen Inc. lost $1.02 to $46.80. Johnson & Johnson, the world's biggest health-products maker, slipped 63 cents to $63.09. A study published in this week's Journal of the American Medical Association found that cancer patients who take anemia drugs sold by the companies have a 10 percent higher risk of dying than those who didn't take the treatments.

The risks of the anemia drugs are well-defined, and the newly published analysis looks exactly like what we've seen before, Roger Perlmutter, Amgen's head of research and development, said in an interview.

Bernanke Pledges Fed Will Act in a `Timely Manner'

Federal Reserve Chairman Ben S. Bernanke signaled the U.S. central bank is prepared to lower interest rates again even amid signs of accelerating inflation.

The Federal Open Market Committee will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks, Bernanke said in semiannual testimony on the economy before the House Financial Services Committee in Washington.

Bernanke's remarks may reinforce investors' expectations that the central bank will lower interest rates further to help a faltering economy. While officials have expressed concern that inflation is accelerating, Bernanke signaled he shares Vice Chairman Donald Kohn's view that financial market turmoil and slowing growth pose the greater threat.

The Fed chief's testimony came as government figures today showed the U.S. economic expansion, now in its seventh year, is increasingly in peril. Durable-goods orders fell 5.3 percent, more than forecast, in January as companies cut spending. New- home sales fell last month to the lowest level since February 1995 even as prices slid by a record 15 percent from a year ago.

Bernanke referred to downside risks for the economy four times in his testimony, and noted that data since the last Fed meeting in January pointed to sluggish growth. Policy choices have also become more complicated as energy and commodity prices rose in recent weeks, he indicated.

Stocks advanced after Bernanke's remarks, with the Standard & Poor's 500 index gaining 0.3 percent to 1,384.86.

Inflation Concern

Inflation is picking up and the public's expectations for prices may also be rising, Bernanke said. He reiterated remarks from testimony to a Senate hearing Feb. 14 indicating policy makers will increasingly take account of the inflation outlook later in the year as the economy stabilizes.

Further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month, Bernanke said.

Consumer prices last year surged 4.1 percent, the most in 17 years, spurred by higher fuel and food costs. A government report yesterday on producer prices showed the 12-month increase in wholesale costs accelerated to 7.4 percent in January, the biggest jump since 1981.

Growth Risks

Risks to the outlook include the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further, the Fed chairman said.

Traders anticipate the central bank will lower the benchmark rate by at least half a point by the end of the next meeting, on March 18, futures prices show. Officials have lowered the rate by 2.25 percentage points since September, to 3 percent.

A half-point reduction to 2.5 percent would bring the rate adjusted for inflation, less food and energy, to almost zero.

Bernanke, 54, is in the seventh month of a credit crisis that began with rising delinquencies on subprime mortgages, while also grappling with the economic impact of the worst housing recession in a quarter century. Banks are making it tougher to get loans after financial companies posted $162 billion in asset writedowns and credit losses since the beginning of 2007.

Price Expectations

In its separate monetary-policy report released with the testimony, the Fed said near-term inflation expectations, measured by surveys, rose somewhat in 2007 and early 2008, presumably because of the increase in headline inflation. Longer-term expectations changed only slightly,

A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability, the Fed chairman said.

Economic reports since the Fed last met on Jan. 29-30 showed the first decline in U.S. payrolls in more than four years in January and a slide in consumer confidence to the lowest level since 2003 this month.

The economic situation has become distinctly less favorable since the time of our July report, Bernanke said. Still, the $168 billion stimulus package enacted by Congress and signed by President George W. Bush this month and continued gains in exports should help growth, he said.

`Little Momentum'

In the semiannual report, the Fed said that the U.S. economy seems to have entered 2008 with little momentum. Labor demand has slowed further of late, it said.

The semiannual monetary policy report used to include a twice-a-year set of economic forecasts by Fed governors and district bank presidents. Bernanke last year increased the frequency of the predictions to quarterly, and the latest projections were released Feb. 20 and included in today's report.

The projections showed officials lowered their prediction for economic growth this year by half a point, to 1.3 percent to 2 percent. Economists surveyed by Bloomberg News predict economic growth will slow to a 0.5 percent annualized pace in the first quarter after expanding 0.6 percent in the previous three months.

Fed officials see inflation returning toward their preference range of 1.7 to 2 percent after running at a 2 to 2.2 percent pace this year, minus food and energy.

Bernanke said the forecasts depend in part on a flattening in energy and food prices. Crude oil this month surpassed $100 a barrel for the first time.

Bernanke focused the final pages of his testimony on the Fed's efforts to strengthen consumer protections and prevent foreclosures. He said in answering questions that the final rules will be released before July.

Fisher Says U.S. to Avoid `Prolonged' Slump in Growth

Federal Reserve Bank of Dallas President Richard W. Fisher said that the U.S. will probably see slower economic growth rather than a deeper downturn.

The most likely scenario is that the U.S. will avoid a prolonged period of negative economic growth, Fisher said during an interview today before a speech in Fort Worth, Texas, without mentioning the term recession. He also said he's hearing increasing expressions of concern about inflation from executives he speaks with, which got his attention.

Fisher spoke after data this week showed the U.S. is moving closer to a recession, while inflation is accelerating at the same time. He said today that the slowdown in growth will probably last for a couple quarters and warned that it may be difficult to quickly raise interest rates.

Fed officials anticipate growth of 1.3 percent to 2 percent this year, down from 2.5 percent in 2007. Two members of the panel charged with dating U.S. economic cycles said yesterday that it's too early to decide whether the U.S. is in recession.

We have to be wary of the fact that we are navigating through an extremely narrow passageway here: with on the one side of us inflationary shoals and on the other the risk of weaker economic growth, said Fisher, who alone voted against the Federal Open Market Committee's Jan. 30 decision to lower the benchmark rate by half a point.

`Very Best'

The Fed is doing its very best to find the right balance between the concerns about both growth and inflation, Fisher said. The central bank must be careful not to stir inflation embers, he said in his remarks today to the Petroleum Club of Fort Worth. Business executives have relayed concerns about building cost pressures, Fisher said.

Policy makers last month lowered their benchmark rate by 1.25 percentage point to 3 percent, with an emergency reduction of three-quarters of a point Jan. 22. The moves were the fastest easing of monetary policy in two decades.

The Fed's rate cuts may be more difficult to reverse in practice than in theory, said Fisher, 58. The former hedge fund manager, U.S. trade official and Senate candidate became head of the Dallas Fed in April 2005.

Minutes of the Fed's Jan. 9 and Jan. 21 conference calls and Jan. 29-30 meeting showed this week that some officials may favor a rapid reversal of rate cuts when the economy stabilizes.

`Bit Precarious'

It just seems to me to put yourself in that position where one might have to shift gears suddenly is a bit precarious, Fisher said today. The ability to raise rates quickly if the mood has shifted may be a more difficult thing to do in practice than in theory, he said.

The minutes also showed officials judged relatively low interest rates may be needed for some time to counteract the faltering economy. Data since the Jan. 30 meeting showed payrolls fell for the first time in four years in January, and private reports indicated a contraction in manufacturing.

The most likely scenario is slower economic growth and yet not prolonged negative activity, Fisher said. We have an anemic economy right now, he said.

The Philadelphia Fed's general economic index fell more than forecast this month to minus 24, the lowest level since February 2001, a report showed yesterday. The Conference Board's gauge of leading indicators dropped 2 percent in the last six months, which the group says can be one of the reasonable criteria for a recession warning.

The National Bureau of Economic Research's business cycle dating committee monitors payrolls, industrial production, sales and incomes in determining whether the economy has entered a recession.

More Cuts Expected

Traders place 100 percent odds that the Fed will cut the benchmark rate by at least half a point by the end of the next meeting on March 18, futures prices show. Policy makers have lowered the target rate for overnight loans between banks by 2.25 percentage points since September, to 3 percent.

Recent inflation figures were not encouraging, he added. He said he's talked to 30 chief financial officers over the past few weeks and has heard more concern about inflation than in the past.

Consumer prices rose 0.4 percent from December, spurred by food and energy costs, rents and clothing. Costs excluding food and energy climbed 0.3 percent, the most since June 2006, the Labor Department said two days ago. From a year earlier, consumer prices rose 4.3 percent, approaching a 16-year high. The core rate was up 2.5 percent.

Fisher told reporters after the speech that he questions whether inflation expectations are well anchored, and that the U.S. economy is in an anemic condition.

He added that there's no doubt there's something wrong in credit markets, and certain excesses may take years to unwind.

U.S. Stocks Rally in Final 30 Minutes, Gain for Week, on Ambac

U.S. stocks rallied in the final 30 minutes of trading, helping the market post its second straight weekly gain, as speculation bond insurer Ambac Financial Group Inc. may be rescued overcame concern bank earnings will falter.

American International Group Inc. and JPMorgan Chase & Co. led the Dow Jones Industrial Average's 243-point turnaround. Ambac, which guarantees more than $500 billion in debt, climbed the most in three weeks after CNBC reported that the bailout to salvage its AAA credit rating may be announced next week.

This will cheer us up, if it in fact turns out to be true, said Bill Stone, who helps oversee $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. People are buying into the story.

The Standard & Poor's 500 Index climbed 10.58 points, or 0.8 percent, to 1,353.11, ending the week up 0.2 percent. The Dow average added 96.72, or 0.8 percent, to 12,381.02. The Nasdaq Composite Index increased 3.57, or 0.2 percent, to 2,303.35. About two stocks gained for every one that fell on the New York Stock Exchange.

Stocks dropped earlier, led by financial shares, on concern that profits at brokerage firms will decline and lower demand for mortgages will curb growth at Fannie Mae and Freddie Mac. Saving Ambac's AAA credit rating for the municipal and asset- backed securities guaranty units would help banks and debt investors limit losses.

Nine of 10 industry groups in the S&P 500 ended the day higher, as the rally in the final half hour reversed declines that earlier had sent every group except for one lower.

Ambac Speculation

Ambac, the second-largest bond guarantor, climbed $1.48, or 16 percent, to $10.71 after CNBC on-air editor Charles Gasparino said the bailout may be announced on Monday or Tuesday, citing bankers working on the deal. Gasparino also said the entire deal could fall apart. The Financial Times reported that banks including Citigroup Inc., Wachovia Corp. and Barclays Plc are lining up to provide $2 billion to $3 billion to Ambac.

The company is exploring capital-raising alternatives and has had discussions with various parties, Douglas Renfield-Miller, an executive vice president at Ambac, said in a telephone interview. He declined to elaborate.

AIG, the largest insurance company, added $1.29 to $48.88. JPMorgan, the third-biggest U.S. bank, climbed 86 cents to $43.93, erasing a 2.7 percent decline. MBIA Inc., the world's biggest bond insurer, gained 28 cents to $12.18 after earlier falling as much as 9.7 percent.

There's some possibility that some of the heat on the financials because of dysfunctional credit markets will be removed, David Kotok, who helps oversee $900 million as chief investment officer of Cumberland Advisors Inc. in Vineland, New Jersey, said in an interview on Bloomberg Radio.

$2.4 Trillion Insured

Speculation about whether the companies in the bond- insurance industry will maintain the AAA credit ratings they rely on to insure about $2.4 trillion in securities has contributed to larger-than-average price swings in the U.S. stock market. Intraday moves in the Dow industrials averaged 234 points this week, more than three times the average of a year ago.

The S&P 500 has lost 7.8 percent this year, while the Dow has dropped 6.7 percent on concern the worst housing slump in a quarter century will drag the economy into a recession.

Federal Reserve Bank of Dallas President Richard W. Fisher said today the U.S. will probably see slower economic growth rather than a deeper slump.

The most likely scenario is that the U.S. will avoid a prolonged period of negative economic growth, Fisher said during an interview today before a speech in Fort Worth, Texas, without mentioning the term recession. He also said he's hearing increasing expressions of concern about inflation from executives he speaks with, which has gotten my attention.

Financials Turn Around

The CNBC report sparked a turnaround in the S&P 500 Financials Index, which had dropped as much as 1.9 percent after Sanford C. Bernstein & Co. analyst Brad Hintz slashed his first- quarter profit estimates for U.S. securities firms and Merrill Lynch & Co.'s Kenneth Bruce said the worst housing market in a quarter century will stifle earnings at Fannie Mae and Freddie Mac through 2011. The financials ended the day up 1.6 percent, with 81 of its 92 members posting gains.

Goldman Sachs Group Inc., the biggest U.S. securities firm, gained $2.54 to $177.71 after earlier dropping as much as 2.2 percent. Lehman Brothers Holdings Inc. added 8 cents to $54.22, recovering from a 3.2 percent tumble. Bear Stearns Cos. increased $2.93 to $85.16.

Hintz cut his first-quarter earnings estimates for the firms by more than 40 percent, saying slumping credit markets, combined with weak revenue from underwriting and advisory fees, will hurt profits.

Fannie, Freddie

Fannie Mae slipped 27 cents to $28.72. Freddie Mac fell $1.14 to $26.61. Bruce downgraded the shares to sell from neutral and said the companies may report significant losses in their fourth-quarter results.

Discover Financial Services added 94 cents to $15.10. Morgan Stanley advised buying shares of the fourth-largest credit-card network, saying it will likely report earnings that top analysts' consensus estimates this year because of lower- than-expected credit losses.

Express Scripts Inc. gained $1.55 to $66.31. The third- largest U.S. manager of drug benefits raised its 2008 earnings forecast and reported profit that beat analysts' estimates as clients used a higher proportion of cheaper generic medicines.

Intuit Tumbles

Intuit Inc. plunged the most in the S&P 500 after the largest maker of tax-preparation software trimmed its annual profit forecast because of slowing sales growth to small companies and a higher tax rate. The shares dropped $2.74, or 9.2 percent, to $27.05 for the biggest decline since February 2006.

Makers of computer chips and related machines retreated after a trade group said North American orders for semiconductor equipment fell 23 percent in January from a year ago.

KLA-Tencor Corp., the second-largest U.S. maker of chip- manufacturing equipment, fell 41 cents to $42.54. Intel Corp., the biggest chipmaker, declined 48 cents to $19.82.

Some 1.42 billion shares changed hands on the NYSE, 11 percent less than the three-month daily average.

With no major economic reports due today, investors will look to next week for further clues on the economy. A report on Feb. 25 will probably show existing home sales declined in January, while a release on Feb. 27 is likely to show a drop in durable goods orders for the same month, according to economists' estimates compiled by Bloomberg News.

Small Caps Slump

The Russell 2000 Index fell 0.1 percent today after Credit Suisse Group said smaller companies may post bigger declines than their larger counterparts as tougher bank lending standards cut their profits.

Nicor Inc. dropped $1.04 to $36.36, the lowest price since April 2005. The Naperville, Illinois-based natural-gas utility forecast 2008 profit of as much as $2.40 per share. That compares with the $2.82 average of analysts' estimates compiled by Bloomberg.

Europe's Dow Jones Stoxx 600 Index fell 0.8 percent after RWE AG, Germany's second-largest utility, reported its first loss since 2000 and Morgan Stanley cut its profit forecast for Renault SA, a French carmaker.

The MSCI Asia Pacific Index lost 0.6 percent as Toyota Motor Corp. and Samsung Electronics Co. declined.

Treasury two-year notes posted their first weekly drop this year and the dollar fell to a three-week low against the euro.

HDFC Bank Agrees to India's Biggest Banking Takeover

HDFC Bank Ltd., India's third- biggest by market value, agreed to acquire Centurion Bank of Punjab Ltd. in the nation's biggest banking takeover as it seeks to extend its reach and become more competitive.

The boards of both banks will meet on Feb. 25 to set the share-swap ratio, and on Feb. 28 to consider the merger, the lenders said in a joint statement in Mumbai today. Centurion is worth $2.6 billion, one-fourth HDFC Bank's value.

HDFC Bank would add 2.5 million customers at 394 branches, extending its reach before the central bank reviews rules next year to permit Citigroup Inc. and other overseas banks to buy local rivals. Indian banks combined are worth less than half the value of the Industrial & Commercial Bank of China Ltd., the world's biggest, according to Bloomberg data.

HDFC Bank's strong financial position and the aggressive management team from Centurion Bank can be the right kind of competition to the fast-growing ICICI, P.R. Dilip, managing director at Impetus Wealth Management, said in Mumbai.

The merged entity will have 1,148 branches, surpassing the 955 of ICICI Bank Ltd., the second-largest lender, according to their Web sites. The transaction must be approved by the central bank and shareholders, the banks said today.

State Bank of India, ICICI and other local lenders are vying for a larger share in an economy estimated to expand 8.7 percent this financial year. The 200-year-old State Bank plans to combine its seven units with itself.

Centurion shares fell 1.1 percent yesterday to 56.4 rupees in Mumbai, after surging 14.4 percent on Feb. 21 amid newspaper reports about the merger. HDFC Bank fell 4.4 percent to 1,474.95, valuing the lender at 522 billion rupees ($13 billion).

Overseas Push

HDFC Bank may raise as much as $1 billion to fund expansion abroad and plans to open offices in Bahrain, Hong Kong and London in a year. State Bank of India, the nation's biggest by assets, is currently raising $4.2 billion selling shares to stakeholders to finance growth. ICICI Bank sold $5 billion of shares to local and overseas investors in June.

Both HDFC Bank and Centurion Bank got licenses in the mid- 1990s as part of the central bank's initiative to encourage so- called new-age banks that would operate efficiently with the latest technology to compete with global banks. HDFC Bank has 10 million customers, compared with Centurion's 2.5 million.

Reliance Power IPO

Centurion, rescued by 3.2 billion rupees of funds from buyout firm Sabre Capital Worldwide Inc. in 2003 after making losses because of bad loans, last week told investors it will meet earnings expectations for the fiscal year. This assurance was made after the Economic Times newspaper reported the bank lost money by investing in Reliance Power Ltd.'s share sale.

Reliance Power fell 17.2 percent in its debut on Feb.11.

Bank of Muscat owns 14.02 percent of Centurion, which is headed by former Standard Chartered Plc Chief Executive Rana Talwar. The bank last year acquired Lord Krishna Bank and had earlier absorbed Bank of Punjab Ltd.

Mergers among Indian banks have so far been limited to those ordered by the central bank to rescue weak lenders.

Global Trust Bank Ltd., a failed non-state-owned bank, was merged with government-owned Oriental Bank of Commerce in 2004. United Western Bank combined with the Industrial Development Bank of India in 2006.

Corporate Bond Risk Soars to Record on CDO Loss Speculation

The cost of protecting corporate bonds from default soared to a record as investors purchased credit-default swaps to hedge against mounting losses in the $2 trillion market for collateralized debt obligations.

The market is full of rumors of unwinding of CDOs, and the price action suggests that people believe the rumors, said Peter Duenas-Brckovitch, head of European credit trading at Lehman Brothers Holdings Inc. in London. It sort of has that Armageddon feel, and the market is feeding on itself.

Securities known as constant proportion debt obligations that package indexes of credit-default swaps may be forced to unwind about $44 billion of assets because of a decline in the value of their holdings, UniCredit SpA analyst Tim Brunne in Munich said today. The value of the so-called CPDOs has fallen to as low as 40 percent of face value, according to Morgan Stanley.

Credit-default swaps on the Markit CDX North America Investment-Grade Index of 125 companies with investment-grade ratings jumped 13 basis points to 167.25 at 8:31 a.m. in New York, according to Deutsche Bank AG.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The CDX index of credit-default swaps doubled this year as bank losses and writedowns on debt investments soared above $145 billion worldwide. The equivalent iTraxx index in Europe rose 16.5 basis points today to a record 134.5, according to JPMorgan Chase & Co., the biggest one-day move since the index started in 2004. The index was at 51 basis points on Jan. 2.

Bank Losses

CDOs package assets and use the income to pay investors. Securities made up of credit-default swaps are known as synthetic CDOs. The notes are losing money as the cost of credit-default swaps rises. CPDOs are based on the CDX and ITraxx indexes.

Moody's Investors Service downgraded 1.1 billion euros ($1.62 billion) of CPDOs arranged by ABN Amro Holding NV, Lehman Brothers Holdings Inc. and BNP Paribas SA last week as asset values fell. CPDOs arranged in 2006 by banks including Amsterdam-based ABN Amro may be forced to unwind if the iTraxx Europe index rises another 5.5 basis points to 140, according to UniCredit's Brunne.

Different CPDOs have different trigger levels, but once one is triggered the negative technical pressure that is created may well cause other triggers to be hit, Willem Sels, a credit analyst at Dresdner Kleinwort in London, said in note to investors today.

CPDO Unwinds

Banks would seek to unwind CPDOs by buying credit-default swap indexes to offset their bets.

What seems to be clear in both Europe and the U.S. is that the continued unwind of leverage and structured products has continued to lead to underperformance in investment grade, Nick Burns, a London-based credit strategist at Deutsche Bank, wrote in a note today.

Contracts on U.K. mortgage lender Alliance & Leicester Plc jumped 40 basis points to 245 after the bank slashed its profit target for this year and next, citing rising borrowing costs and declining valuations on asset-backed securities because of the U.S. subprime mortgage slump.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts on Standard Chartered Plc rose 3 basis points to 112 after the London-based bank abandoned a plan to refinance its $7.15 billion Whistlejacket Capital Ltd. structured investment vehicle, the largest SIV run by a bank to collapse.

KKR Financial

KKR Financial Holdings LLC, the $18 billion publicly traded credit fund run by Kohlberg Kravis Roberts & Co., delayed repaying some of its asset-backed commercial paper and started restructuring talks with its creditors, according to a regulatory filing yesterday.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings jumped 26 basis points to 611, according to JPMorgan prices. Contracts on the benchmark Markit iTraxx Asia Ex-Japan index rose by 24 basis points to 295, according to ICAP Plc.

The risk of defaults on European LBO loans is the highest recorded by the benchmark Markit iTraxx LevX Senior Index of loan credit-default swaps. The index fell to 90, according to Bank of America Corp. prices, the lowest since it started in October 2006. A level below 100 indicates loans are valued below par.

Mortgage applications tumble

Volume of applications dropped more than 22% as most interest rates increased sharply, MBA's weekly survey says.

Mortgage application volume tumbled 22.6% during the week ending Feb. 15 as most interest rates moved higher, according to the Mortgage Bankers Association's weekly application survey.

The MBA's mortgage application index fell to 822.8 for the week, from 1,063.5 during the previous week.

Refinance volume dropped 27.9% during the week, while purchase volume fell 11.55%. Refinance applications accounted for 61.7% of total applications.

The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.

An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 822.8 means mortgage application activity is 8.228 times higher than it was when the MBA began tracking the data.

The survey provides a snapshot of mortgage lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.

Application volume slipped as most interest rates rose sharply. The average interest rate for traditional, 30-year fixed-rate mortgages increased to 6.09% from 5.72%. The average interest rate for 15-year fixed-rate mortgages, a popular option for refinancing a home, increased to 5.55% from 5.18%.

The average rate for one-year adjustable-rate mortgages remained steady at 5.72%.

Consumer Prices in U.S. Increase More Than Forecast

Consumer prices in the U.S. rose more than forecast in January, indicating that the faltering economy hasn't alleviated inflation pressures.

The 0.4 percent increase in the cost of living matched the gain in December, the Labor Department said today in Washington. Excluding food and energy, prices rose 0.3 percent, after a 0.2 percent climb a month earlier, leading the so-called core rate to the biggest increase since June 2006.

A jump in food and energy costs, rents and clothing prices led the index higher last month. The report underscores that Federal Reserve policy makers can't set aside inflation concerns as they weigh more interest-rate cuts to prevent a recession.

Inflation is uncomfortably high, Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview with Bloomberg Television. Once the U.S. economy looks like it's started to stabilize, the Fed will be raising rates back up to neutral, because inflation is not going away, she said.

A separate report today showed that housing starts in the U.S. stayed near the lowest level since 1991 last month. Work began on 1.012 million homes at an annual rate, up 0.8 percent from December, the Commerce Department said. Building permits dropped 3 percent to 1.048 million, a 16-year low.

Treasury securities dropped, with 10-year note yields rising to 3.93 percent at 9:11 a.m. in New York from 3.90 percent late yesterday.

Economists' Forecasts

Economists forecast the consumer price index would rise 0.3 percent, according to the median of 74 projections in a Bloomberg News survey. Estimates ranged from an increase of 0.1 percent to one of 0.4 percent.

Core consumer prices were forecast to rise 0.2 percent, according to the Bloomberg News survey. Estimates ranged from a gain of 0.1 percent to an increase of 0.3 percent.

Energy prices last month increased 0.7 percent, after rising 1.7 percent the previous month. Fuel costs were up 4.5 percent.

Food prices, which account for about a fifth of the CPI, rose 0.7 percent. Apparel prices rose 0.4 percent after a 0.1 percent increase in December.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

Rate Cuts

Some bond investors are concerned that the Fed's interest- rate cuts, totaling 2.25 percentage points since September, threaten to stoke inflation. The reductions came at a time of rising energy and commodity costs, and a falling U.S. dollar.

The trend is showing elevated levels of inflation above where the Fed would like it to be, said Don Alexander, director of fixed income in New York at Citigroup Global Wealth Management, which oversees about $1.3 trillion in assets. You're not rewarded for taking the risk of investing in longer-dated Treasuries, he said.

A measure of price expectations derived from the gap in yields between 10-year notes and 10-year Treasuries linked to inflation rose to 2.39 percent today from 2.20 percent last month.

Still, Fed Chairman Ben S. Bernanke and other officials this month indicated that price expectations have yet to reach a level triggering their concern. The Fed chief told lawmakers Feb. 14 that inflation expectations appear to have remained reasonably well anchored.

Most Since 1990

Citing a worsening economic outlook, the central bank last month lowered its benchmark interest rate by 1.25 percentage point during two meetings, the fastest rate reduction since the federal funds rate because the main policy tool around 1990.

Compared with a year earlier, consumer prices rose 4.3 percent, more than the 4.1 percent gain reported for December. The so-called core rate was up 2.5 percent from January 2007, the biggest jump since March 2007, compared with a 2.4 percent increase for all of 2007.

Rents, which make up almost 40 percent of the core CPI, rose 0.3 percent.

Slower economic growth may help damp price pressures.

Economic growth slowed to a 0.6 percent pace in the fourth quarter and the economy lost jobs in January for the first time in more than four years, according to government figures.

Wal-Mart

Wal-Mart Stores Inc., the world's largest retailer said yesterday that fourth-quarter profit rose more than analysts had forecast after it stepped up U.S. holiday discounts and boosted sales in Asia and Latin America. Before the holiday season the company made price cuts on 20 percent more items and, last month, it marked down groceries, medicine, fitness equipment and electronics as much as 30 percent.

The government said Feb. 15 that prices of goods imported into the U.S. jumped 1.7 percent in January, pushed up by higher costs for energy and food. The producer price index is scheduled to be released Feb. 26.

PPI and CPI have some differences in timing that may cause discrepancies. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.

U.S. Stocks Drop, Led by Banks and Tech Companies; Intel Falls

U.S. Stocks Drop, Led by Banks and Tech Companies; Intel Falls

U.S. stocks fell for the first time this week after analysts said Intel Corp. may be hurt by slower computer sales and Federal Reserve Chairman Ben S. Bernanke warned that tighter credit will restrain growth.

Intel, the world's largest chipmaker, slumped the most in eight days. Merrill Lynch & Co. and Goldman Sachs Group Inc. led brokers lower after Lehman Brothers Holdings Inc. predicted more writedowns from credit-market losses. The declines overshadowed a rally in energy shares sparked by faster-than-expected Japanese economic growth that sent Tokyo's Nikkei 225 Index to its biggest gain since 2002.

The Standard & Poor's 500 Index lost 3.27 points, or 0.2 percent, to 1,363.94 at 10:48 a.m. in New York. The Dow Jones Industrial Average slid 45.84, or 0.4 percent, to 12,506.4. The Nasdaq Composite Index decreased 7.42, or 0.3 percent, to 2,366.51. Almost two stocks declined for every one that rose on the New York Stock Exchange.

There are probably more writedowns to come, and that's going to impact things, said Kurt Brunner, who helps manage $1.6 billion at Swarthmore Group Inc. in Philadelphia. It's been nice to see three up days in a row, but I don't think we're in a steady upward trend. You're still going to have pockets of weakness. We're not in a robust, healthy economy.

'Source of Restraint'

Bernanke's comments added to concern that credit-market losses will spread beyond the financial industry after the world's largest banks and securities firms wrote down $146 billion since the beginning of 2007.

More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth, Bernanke said in prepared remarks to a Congressional committee.

Merrill slid 8 cents to $52.10. Goldman lost 97 cents to $179.21. Financial companies in the S&P 500 lost 1 percent as a group.

Intel lost 55 cents to $20.67.

The key downside risk to our view is a significant deceleration in PC unit growth and lack of meaningful margin expansion, analysts including James Covello and Simon F. Schafer wrote in a report. The brokerage maintained its buy recommendation on the shares, saying Intel's fundamentals remain unchanged.

Micron Technology Inc., the largest U.S. maker of memory chips, and Novellus Systems Inc. were downgraded to sell from neutral at Goldman. Micron lost 18 cents to $7.21. Novellus, a maker of equipment that helps turn silicon wafers into computer chips, fell 41 cents to $24.30.

Energy Rally

Energy shares climbed after Japan's economy grew twice as fast as estimated and U.S. jobless claims fell, sending crude oil up $1.09 to $94.36 a barrel.

Exxon Mobil Corp., the world's largest publicly traded oil company, rose 97 cents to $86.46 and Chevron Corp., the second- largest U.S. oil producer, climbed $1.26 to $83.38.

Comcast Corp. surged $1.33, or 7.5 percent, to $19.14. The largest U.S. cable television operator said fourth-quarter profit rose 54 percent, topping analysts' estimates. The company also said it will buy back $6.9 billion of its stock over two years and pay its first dividend in almost a decade.

MBIA Inc., the world's biggest bond insurer, gained 71 cents to $12.35 after saying it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.

A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced, MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.

The MSCI World Index added 0.8 percent to 1,457.68 and Europe's Dow Jones Stoxx 600 Index gained 0.8 percent after climbing as much as 1.3 percent.

Paulson, Bernanke: No recession in '08

Treasury secretary and Fed chairman say rate cuts and rebates should keep economy out of downturn.

Treasury Secretary Henry Paulson, left, and Fed Chairman Ben Bernanke believe the U.S. will avoid a recession.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson both acknowledged problems in the U.S. economy on Thursday, but both said they believe the nation will avoid falling into recession.

In prepared testimony before the Senate Banking Committee, the head of the central bank and the Bush administration's point man on the economy said that steps taken already this year will be able to keep the economy moving forward despite the continued downturn in housing and troubles in credit markets.

"At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt," said Bernanke in prepared remarks, referring to a series of Fed interest rate cuts and a $170 billion tax rebate and stimulus plan signed by President Bush Wednesday.

The Fed last month made two deep rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.

Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic reading justify it.

"The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said.

Paulson echoed frequent comments he's made in recent weeks that he expects slower growth but no recession, even with the problems faced by the economy.

"The U.S. economy is fundamentally strong, diverse and resilient, yet after years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction," he said in his prepared remarks. "The housing correction, high energy prices and capital market turmoil are weighing on current economic growth."

A number of closely watched economic readings in recent weeks, including the January jobs report and the reading on business activity in the service sector, have convinced a growing number of economists that the economy has already into recession.

Senate Banking Chairman Christopher Dodd, D-Conn., opened the hearing by saying that the economy was at the greatest risk of any time since the Sept. 11 terrorist attacks. He said further steps need to be taken, adding that the slowdown is due to a crisis of confidence among both consumers and investors.

Oil prices extend rise above $93 a barrel

Oil up on market gains, supply worries, as Venezuela continues to battle with Exxon Mobil.

Oil prices extended their modest rise Thursday, supported by Wall Street's overnight gains and threats to U.S. oil supplies.

Wall Street rallied Wednesday after the U.S. Commerce Department said retail sales rose unexpectedly last month. Energy investors often view the equity market as a barometer of economic health, worrying that any slowdown in growth will lead to a corresponding slump in energy demand.

Traders also remain concerned about Venezuelan President Hugo Chavez's threat to halt oil sales to the United States in response to Exxon Mobil Corp.'s bid to freeze billions of dollars in Venezuelan assets. Exxon Mobil is challenging the nationalization of its Venezuelan oil ventures in U.S. and European courts.

A federal judge in New York on Wednesday confirmed the freezing of $300 million in cash held by Venezuela's state-run oil company, finding it probable that Exxon Mobil will win its legal battle against the company.

But Venezuelan Oil Minister Rafael Ramirez vowed earlier in the day to defeat Exxon Mobil in its legal battle with Petroleos de Venezuela SA, which has threatened to halt crude sales to the U.S. oil company

"We're going to come out of this battle successful," Ramirez told a rally of oil workers in the eastern state of Anzoategui. "Exxon Mobil isn't pleased with our government. It matters little to our government what Exxon Mobil thinks."

Light, sweet crude for March delivery rose 19 cents to $93.46 a barrel in in electronic trading by late morning in Europe ahead of the opening of floor trading on the New York Mercantile Exchange.

The contract rose 49 cents to settle at $93.27 a barrel on Wednesday.

Brent crude added 78 cents to reach $94.10 a barrel on the ICE Futures exchange in London.

Investors were also heartened by U.S. President George W. Bush's signing Wednesday of the $168 billion economic stimulus package that will send tax rebate checks to millions of Americans.

Oil prices have fallen from a January record above $100 a barrel largely on concerns about economic growth and falling demand for oil and gasoline.

Traders shrugged off a mixed U.S. government inventory report that said crude oil supplies grew 1.1 million barrels last week, less than the expected 2.7 million barrel increase.

The U.S. Energy Information Administration said gasoline inventories rose 1.7 million barrels while inventories of distillates, which include heating oil, dropped 100,000 barrels last week.

Heating oil futures added 0.48 cent to reach $2.6204 a gallon while gasoline prices rose 0.78 cent to $2.3977 a gallon.

Natural gas futures rose 11.2 cents to $8.50 per 1,000 cubic feet.

AIG's Sullivan May Find Job at Stake After Writedown

American International Group Inc. Chief Executive Officer Martin Sullivan may find his job at stake after an accounting lapse led to a bigger-than-forecast drop in the value of the company's holdings.

AIG rebounded in New York trading today after saying losses from so called credit-default swaps will not be material. The company fell the most in two decades yesterday after disclosing the contracts, sold to protect fixed-income investors, declined four times more than a previous estimate. Sullivan, 53, had assured investors in December that writedowns tied to the U.S. housing market were manageable.

You have to question Sullivan's leadership ability, said Rose Grant, who helps manage $2 billion in assets including AIG shares for Boston-based Eastern Investment Advisors. People are frustrated with the performance of the stock, basically throwing in the towel. His job definitely could be in jeopardy.

Citigroup Inc. and Merrill Lynch & Co. removed their CEOs last year after they underestimated losses tied to subprime mortgages. AIG, which appointed Sullivan three years ago after accounting and sales probes led to the ouster of Maurice Hank Greenberg, said it still doesn't know what the contracts were worth at the end of 2007. The company's market value has fallen about 30 percent during Sullivan's tenure.

AIG gained $1.71, or 3.8 percent, to $46.45 at 11:33 a.m. in New York Stock Exchange composite trading. Yesterday the New York-based insurer tumbled 12 percent, the biggest daily decline since the market crash of Oct. 19, 1987.

Possible Loss

Auditor PricewaterhouseCoopers LLP found material weakness in AIG's accounting for the contracts, called credit- default swaps, the company said in a regulatory filing yesterday.

The $4.88 billion decline in value of the credit-default swaps may have wiped out AIG's fourth-quarter profit, Citigroup analyst Joshua Shanker said yesterday in a research note. Fitch Ratings said in a statement that it may lower the insurer's AA credit rating.

The insurer believes that any losses from meeting obligations on its credit-default swap portfolio will not be material to the company, AIG said in a statement today.

The company said in the filing yesterday that it has procedures to appropriately determine the fair value of its holdings. Sullivan declined to be interviewed, AIG spokesman Chris Winans said.

AIG's financial products unit issues contracts that promise to reimburse investors for losses tied to $505.5 billion of securities as of Nov. 25, including corporate debt, European mortgages and collateralized debt obligations, which bundle loans.

New Chief

Greenberg ran AIG for 38 years until he was forced to retire in March 2005, two months before then-New York State Attorney General Eliot Spitzer sued and accused Greenberg of ordering improper transactions to hide losses and inflate reserves. Greenberg has maintained he did nothing wrong.

Sullivan steered the insurer through a $1.64 billion settlement of probes started by Spitzer and federal regulators, and restatements of 2000 to 2005 results that cut profit by $3.4 billion. He also led an overhaul of AIG's accounting and regulatory systems. The company blamed those restatements on weaknesses in internal controls that it said were found after Greenberg left. PricewaterhouseCoopers, AIG's auditor for more than two decades, was rehired in October.

It is incomprehensible that yet once again, this company, its board, its CEO and CFO, and its independent auditors are saying the company doesn't have adequate controls, said Lynn Turner, former chief accountant at the U.S. Securities and Exchange Commission and now on the board of Guidance Software Inc. and the Colorado Public Employees' Retirement Association. These people should all be held accountable.

Legal Consequences

Shareholder lawsuits and an SEC investigation may follow, said Tamar Frankel, a law professor at Boston University specializing in financial regulation. A material weakness is a really red flag for the SEC, she said.

SEC spokesman John Nester declined to comment. David Nestor, a PricewaterhouseCoopers spokesman, and Ken Frydman, a spokesman for Greenberg, declined to comment.

Sullivan's accounting overhaul didn't catch the latest accounting weakness because either these are new problems or more likely, these are problems that existed before and the regulators didn't go far enough, said Edward Ketz, a Pennsylvania State University accounting professor.

Net Income

AIG's net income, which set a record under Sullivan in 2006, fell 27 percent in 2007's third quarter on losses linked to the U.S. housing slump, including a $352 million reduction in the value of the derivatives. The company, which has units that originate, insure and invest in subprime mortgages or securities, is scheduled to announce fourth-quarter results later this month.

Investors eventually will look back at yesterday's announcement and conclude they overreacted, said David Katz, chief investment officer for New York-based Matrix Asset Advisors, who supports Sullivan.

The things that he can control, we're comfortable he's done a good job managing them, said Katz, whose firm manages $1.6 billion, including 845,000 AIG shares. The subprime fallout was part of the hand he was dealt.

Yahoo to Reject Microsoft Buyout Offer, May Find Few Options

Yahoo! Inc., the Internet company that has failed to crack Google Inc.'s dominance of Web search, plans to reject a $44.6 billion takeover bid from Microsoft Corp., a person familiar with the situation said.

The board spent a week reviewing the $31-per-share unsolicited offer before deciding it was too low, and directors are likely to reject it tomorrow, said the person, who declined to be identified because the discussions aren't public. Yahoo wants at least $40, the Wall Street Journal reported yesterday.

The decision steps up pressure on co-founder Jerry Yang to present investors with a strategy to revive a stock that lost half its value in the two years before the offer. He may look to outsource its search efforts to Google or find another buyer, though analysts said it is unlikely that any other options will emerge and Microsoft may make a higher offer to win.

A lot of this is gamesmanship on the part of Yahoo, said Scott Kessler, an equity analyst at Standard & Poor's in New York who recommends holding Yahoo and buying Microsoft. Microsoft is well aware that Yahoo doesn't have any other options. What this is about is how much Microsoft wants Yahoo and how much time they're willing to wait to get this deal done.

Microsoft, the biggest software maker, could pay $40 for No. 2 Internet search company Yahoo, Kessler said. It is more likely the companies reach a deal for less, he said. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor, said last week Microsoft may have to bid $34 to $37.

Yahoo spokeswoman Diana Wong said yesterday the company doesn't comment on rumors or speculation. Microsoft spokesmen Frank Shaw and Bill Cox didn't return calls yesterday.

Yang Resists

Yahoo, based in Sunnyvale, California, has posted eight straight quarters of profit declines and spent years trying and failing to catch up with Google in Web queries and the lucrative market for ads linked to search results.

Together, Microsoft and Yahoo would control more than a quarter of the market for animated ads and colorful display banners at the top of Web pages. Google hasn't made much progress there, giving the combined company a way to challenge Google and start going after emerging markets such as mobile-phone ads.

Still, Yang, 39, has resisted letting go of the company he co-founded in 1995 as a graduate student at Stanford University. He replaced Terry Semel as chief executive officer in June and intended to craft a strategy to revitalize Yahoo.

Hostile Measures

Yahoo is betting Microsoft won't take hostile measures to win the bid, the Journal said, even though the software maker has indicated that is a possibility. A person familiar with the matter said last week that Redmond, Washington-based Microsoft may seek to oust Yahoo directors should they reject its offer.

Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal, Microsoft CEO Steve Ballmer said in a letter to Yahoo's board that was made public when the offer was announced Feb. 1.

Yahoo rose 16 cents to $29.20 Feb. 8 in Nasdaq Stock Market trading and Microsoft added 44 cents to $28.56.

The offer is 62 percent more than Yahoo's stock price before the bid. The shares have climbed above the value of the cash-and- stock bid, showing shareholders expect a higher price. Microsoft plans to let investors choose cash or stock, at a ratio that will end up being about 50-50.

Microsoft shares have declined since the bid, lowering the value of the stock portion and pushing the total value of the deal to about $29.08 a share.

Yahoo is getting financial advice from Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Moelis & Co., according to two people familiar with the matter. Morgan Stanley and Blackstone Group LP are counseling Microsoft.

Google Possibility

Yahoo might seek help from rivals, soliciting other bids or seeking partnerships with Rupert Murdoch's News Corp. or Google to thwart Microsoft, according to analysts including Stanford Group Co.'s Clayton Moran.

Google CEO Eric Schmidt contacted Yang to suggest a partnership, the New York Times reported Feb. 4. A partnership with Mountain View, California-based Google may allow Yahoo to outsource its search service, shedding the costs of running its own search engine and sharing ad revenue with its larger rival.

Google spokesman Matt Furman declined to comment.

While a Google partnership is an option, it would face stiff regulatory scrutiny, Moran said. News Corp. isn't interested in bidding for Yahoo, Murdoch said on a Feb. 4 conference call. That means Yang's options probably won't pan out, said Andrew Frank, a New York-based analyst at researcher Gartner Inc.

The U.S. Justice Department is interested in reviewing the antitrust implications of a Yahoo-Microsoft transaction, spokeswoman Gina Talamona said after the bid was announced. Neelie Kroes, commissioner of competition for the European Commission, said her agency also would scrutinize a deal.

G-7 Says Growth May Weaken, Stops Short of Remedies

The Group of Seven nations said the U.S. economy may slow further and erode global growth, while stopping short of proposing specific measures in response.

Downside risks still persist, which include further deterioration of the U.S. residential housing markets, tighter credit conditions and heightened inflation expectations in some countries, a statement by G-7 finance ministers and central bankers said in Tokyo today. They kept up pressure on China to allow the yuan to appreciate and said they'd cooperate on foreign exchange as appropriate.

The G-7 nations are at odds on how to tackle a global slowdown sparked by a U.S. housing recession. The U.S. has encouraged its counterparts to use fiscal policy to revive growth. Japan and Canada say they won't follow suit and Germany argues attention should be paid to the causes of last year's credit- market rout rather than how to limit the economic damage.

A house-price collapse has pushed the world's largest economy close to a recession and the U.S. this week urged the G-7 to follow its example and take prudent action to protect their economies. Treasury Secretary Henry Paulson has negotiated a package, including tax rebates, worth $168 billion with Congress, and the Federal Reserve last month cut its key interest rate twice in nine days to 3 percent, the fastest easing of policy since 1990.

Slowing Growth

In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, the statement said. In the U.S. risks have become more skewed to the downside.

German Finance Minister Peer Steinbrueck and U.K. Chancellor of the Exchequer Alistair Darling said yesterday that scope for coordinated action to shore up the global economy is limited.

The group consists of the U.S., the U.K., Canada, Italy, France, Germany and Japan. China didn't attend the main talks at this gathering.

The G-7 agreed that China should do more to defuse global trade tensions, reflecting European and Canadian concern that their currencies are bearing too much of the burden of the dollar's slide.

While the yuan has climbed 6 percent against the dollar since the October statement, it's risen just 2 percent against the euro in the same period. French Finance Minister Christine Lagarde said today that the stronger euro continues to pose difficulties for European exporters.

China's Yuan

We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate, the statement said. The language is similar to that used by the G-7 at their last meeting in October, when they singled out the yuan.

China overtook the U.K. as the euro area's biggest supplier last year. The euro has gained 11.5 percent against the dollar in the past year.

Global price pressures are making it harder for central banks to coordinate interest-rate policy. While the Bank of England this week cut its benchmark rate for the second time in three months and European Central Bank President Jean-Claude Trichet dropped a threat to raise rates, both central banks stressed inflation risks. October's statement contained no mention of global inflation risks.

May Coordinate Action

The G-7 omitted a commitment made at the last meeting in Washington to fiscal discipline. The group said it was possible they may agree to coordinate action to spur growth and ensure financial stability in the future.

The ECB and the Fed moved in concert with three other central banks in December to alleviate the credit squeeze in the biggest act of international cooperation since the Sept. 11 terrorist attacks.

Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies, the statement said.

The G-7 pledged to act on the recommendations of the Financial Stability Forum of regulators, which today proposed measures to prevent a repeat of last year's credit crisis.

Italian central bank Governor Mario Draghi, who drafted the report, said banks should publish more information about their losses and improve risk management.

The report also said authorities must address potential conflicts of interest at credit-rating companies and improve understanding of banks' off-balance sheet positions, according to the statement.

The G-7 also asked the International Monetary Fund and the Basel, Switzerland-based Financial Stability Forum to report at the next meeting in April on their respective roles in identifying potential vulnerabilities and enhancing early warning capabilities, it said.

Sales at U.S. Retailers Languish on Recession Concern

Sales at U.S. retailers languished in January as discounts failed to lure consumers concerned that a recession is coming. Macy's Inc. and Nordstrom Inc. reported declines, while the gain at Wal-Mart Stores Inc. was less than analysts estimated.

Sales at stores open at least a year rose 0.5 percent at Wal-Mart as winter storms discouraged shoppers in the Midwest and fewer customers redeemed gift cards. The monthly increase among retailers was also 0.5 percent, the worst January since 1970, the International Council of Shopping Centers said today.

Department stores and mall-based shops slashed prices on clothing and bedding to attract customers following the slowest holiday season since 2002. Consumers refrained from spending as median home values probably fell for the first time since the Great Depression and employers cut back on hiring.

You're seeing the continuing unfolding of the consumer spending slowdown, said Ken Perkins, president of Retail Metrics LLC, a Swampscott, Massachusetts-based research firm. Clearance sales were widespread, there were certainly enough incentives to draw the consumer in under normal economic circumstances, but consumers are hunkering down.

Department stores have been hit hard by a decline in customer visits to malls and a lack of new products that excite consumers, Perkins said. Nordstrom's sales sank 6.6 percent. Analysts surveyed by Retail Metrics expected a 0.4 percent decline.

Macy's, the second-biggest U.S. department-store chain, said yesterday that January same-store sales dropped 7.1 percent, cut its fourth-quarter profit forecast and said it will eliminate 2,300 jobs. Kohl's, the fourth-largest U.S. department-store chain, posted a 8.3 percent decline, worse than the estimate for a 7.9 percent drop.

J.C. Penney Profit

J.C. Penney Co. said monthly results fell 1.9 percent, better than its forecast, and said fourth-quarter profit would be at the high end of its projection of $1.65 to $1.80 a share.

The retailers' shares rose, with the Standard & Poor's 500 Retailing Index gaining 2.5 percent after losing 8.3 percent during the previous three sessions.

J.C. Penney climbed $4.13, or 9.5 percent, to $47.85 at 10:27 a.m. in composite trading at the New York Stock Exchange. Wal-Mart, the world's largest retailer, was unchanged at $48.83 while Kohl's rose 4.7 percent to $44.92.

Sales weren't great, but they generally weren't worse than expected, said Howard Tubin, a retail analyst at RBC Capital Markets in New York. Given the lack of additional bad news, the sector is rallying a bit today.

Low Expectations

Among retailers tracked by Retail Metrics, 57 percent of them beat very low expectations, Perkins said today in a statement.

Same-store sales are seen as a key gauge of a retailer's performance because they exclude locations that have recently opened or closed.

Sales dropped 8 percent at Limited Brands Inc., owner of the Victoria's Secret chain. The sales decrease exceeded the average analyst estimate for a decline of 7.1 percent. American Eagle Outfitters Inc. said yesterday that same-store sales fell 7 percent.

Wal-Mart had predicted a January same-store sales gain of 2 percent, the same as the average Retail Metrics estimate.

Target Corp., the second-largest U.S. discount chain, reported a 1.1 percent decline. It had said Jan. 21 it expected January sales to be near the low end of its forecast range of a 1 percent decrease to a 1 percent gain.

Other retailers performed better than analysts expected.

Children's Place

Children's Place Retail Stores Inc. reported a 6 percent same-store sales increase, ahead of the 3.6 percent estimated gain. AnnTaylor Stores Corp., a women's clothing retailer, said sales were unchanged from a year earlier, better than the estimated 3.7 percent decline. Chief Executive Officer Kay Krill said in the statement it was promotionally aggressive to clear inventory.

Gap Inc., the biggest U.S. clothing retailer, said same- store sales decreased 2 percent, better than the 6.1 percent drop predicted by analysts. Gap said it was able to clear out holiday merchandise on higher margins than planned and boosted its full-year profit forecast.

January consumer confidence fell near a two-year low, the Conference Board reported last week, as Americans struggled with higher energy costs and the persistent housing slump. Last month the U.S. unexpectedly lost jobs for the first time in more than four years.

Median Price

The median price of an existing single-family home dropped 1.8 percent in 2007, the first decline since records began four decades ago and probably the first drop since the Great Depression in the 1930s, the National Association of Realtors said last month.

Morgan Stanley, Merrill Lynch & Co., Goldman Sachs Group Inc. and Citigroup Inc. are forecasting the first recession since 2001 this year. The Federal Reserve on Jan. 30 lowered its benchmark interest rate for the second time in nine days. Congress is considering fiscal stimulus plans that would provide tax rebates to try to spur consumer spending.

Wal-Mart and Costco Wholesale Corp. may benefit because they sell necessities such as groceries, and some consumers may be trading down, Timothy Ghriskey, who helps manage more than $2 billion at Solaris Asset Management LLC in Bedford Hills, New York, said yesterday. Last month Wal-Mart cut prices up to 30 percent on food, televisions, and home and exercise products.

Costco said today in a statement that same-store sales rose 7 percent. Analysts expected 6.3 percent.

The National Retail Federation last month predicted 2008 total sales would rise 3.5 percent from last year, which may be the slowest gain in six years.

U.S. Stocks Fall After Service Industries Unexpectedly Shrink

U.S. stocks tumbled the most in three weeks after service industries fell to the lowest levels since 2001, reinforcing speculation the economy has tipped into a recession.

Exxon Mobil Corp., General Electric Co. and AT&T Inc. led declines in New York trading, and all 10 industry groups in the Standard & Poor's 500 Index retreated, after the Institute for Supply Management's index unexpectedly contracted in January. Goldman Sachs Group Inc. posted its biggest drop in two months on Oppenheimer & Co. analyst Meredith Whitney's downgrade of the largest securities firm.

As the recession unfolds, then profits will disappoint, Stuart Schweitzer, who helps oversee $420 billion as the global markets strategist at JPMorgan Private Bank, said in a Bloomberg Television interview from New York. It's already under way.

The S&P 500 lost 27.26, or 2 percent, to 1,353.56 at 11:20 a.m. in New York. The Dow Jones Industrial Average decreased 238.02, or 1.9 percent, to 12,397.14. The Nasdaq Composite Index slipped 40.03, or 1.7 percent, to 2,342.82. Shares also retreated in Asia and Europe.

About six stocks fell for every one that rose on the New York Stock Exchange after the ISM's non-manufacturing index, which reflects almost 90 percent of the economy, slumped to 41.9 from 54.4 the prior month. A reading of 50 is the dividing line between growth and contraction.

GE, the second-largest U.S. company by market value, lost 65 cents to $34.72. AT&T, the nation's biggest phone company, declined $1.25 to $36.91.

Energy Shares Slump

Crude oil for March delivery fell 1.7 percent to $88.47 a barrel in New York after the ISM report bolstered speculation fuel demand will slow in the U.S., the world's biggest energy consumer. Gold and copper prices also declined, dragging down shares of mining companies.

Exxon Mobil Corp., the biggest U.S. energy company, lost $2.20 to $83.24. Chevron Corp., the second-largest, declined $1.78 to $80.24. Freeport-McMoRan Copper & Gold Inc. retreated $3.85 to $87.33. Newmont Mining Corp. fell 30 cents to $50.61.

Goldman dropped $8.44, or 4.2 percent, to $192.36. The firm was cut to perform from outperform by Oppenheimer's Whitney. The stock's valuation will not be sustainable in a year when Goldman Sachs will probably deliver results that will not be substantially better than its peers, Whitney wrote in a note dated Feb. 4.

Citigroup Inc., the biggest U.S. bank by assets, lost $1.11 to $28.11. Merrill Lynch & Co., the nation's third-largest securities firm, slid $2.49 to $55.24. The S&P 500 Financials Index retreated 3.3 percent, the biggest decline since Jan. 17.

Ratings Watch

Banks and brokerages also retreated after Fitch Ratings said collateralized debt obligations may be downgraded as many as five levels. The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to ratings guidelines proposed by Fitch today. CDOs that package high-yield assets may be cut as many as three levels for the portions first in line for losses.

National Semiconductor Corp. fell $1.31 to $17.71. The maker of chips for devices such as Apple Inc.'s iPhone said revenue this quarter will be as much as $455 million. That's below the $484 million average estimate of analysts in a Bloomberg survey. The company on Dec. 6 forecast sales of $474 million to $495 million.

Texas Instruments Inc., the biggest maker of mobile-phone chips, dropped $1.22 to $29.94. Intel Corp., the world's largest chipmaker, lost 73 cents to $20.35.

Fed Bets

Traders boosted bets on Federal Reserve interest-rate cuts after the ISM report. Fed funds futures indicate a 100 percent chance policy makers will lower the target for overnight loans between banks by 0.5 percentage point to 2.5 percent by a March 18 policy meeting. That compares with 68 percent odds yesterday.

General Motors Corp. slipped 46 cents to $27.11. GMAC LLC, the lending company that General Motors sold to a hedge fund manager, lost $724 million in the fourth quarter because home buyers didn't keep up with their mortgage payments. A group led by Cerberus Capital Management bought a 51 percent stake in GMAC in 2006.

NYSE Euronext slipped $7.44 to $75.29. The owner of securities exchanges on both sides of the Atlantic said fourth- quarter earnings more than tripled on record equity trading and new listings. Excluding merger costs and one-time charges, profit was in line with the average estimate of 12 analysts surveyed by Bloomberg.

New iPhone

Apple Inc. gained 19 cents to $131.84 after unveiling higher-priced models of its iPhone mobile handset and iPod media player with double the memory of previous versions.

KB Home climbed 55 cents to $26.71 after Bank of America Corp. raised its recommendation on the Los Angeles-based homebuilder to buy from neutral.

Significantly better affordability drives demand, analysts including Michael R. Wood wrote in a note to clients dated Feb. 4. While we do not expect a spike in demand immediately, we expect that it will gradually improve over 2008.

Seagate Technology increased 66 cents to $21.40. The world's largest maker of hard-disk drives raised its quarterly dividend by 20 percent and announced plans to buy back as much as $2.5 billion of stock over the next two years.

Whirlpool Corp. added $8.52 to $90.11. The world's largest appliance maker posted fourth-quarter profit that topped analysts' estimates on an increase in overseas sales and reduced costs following its acquisition of Maytag Corp.

Microsoft May Borrow for First Time to Buy Yahoo

Microsoft Corp., the world's largest software maker, will probably borrow money for the first time to finance its proposed $44.6 billion takeover of Yahoo! Inc., Chief Financial Officer Chris Liddell said.

The company will use available cash and stock to pay part of the $31 a share it has offered for Yahoo, Liddell told analysts today at a conference in New York. Microsoft will raise the rest by tapping the capital markets for the first time in its history to complete the biggest technology takeover ever.

Liddell said the company wanted to offer an attractive price to speed acceptance of the bid as it takes on Google Inc. in the Internet advertising market. Microsoft, which had $21.1 billion in cash and short-term investments as of Dec. 31, proposes to pay half the Yahoo purchase price with cash and half with stock. Liddell didn't say how much the company is likely to borrow.

Given the visibility of their cash flow, they'll probably get a low rate, said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who advises investors to buy Microsoft shares. You can't find many companies with more stable cash flow than Microsoft.

Microsoft, based in Redmond, Washington, rose 7 cents to $30.52 at 11:11 a.m. New York time in Nasdaq Stock Market trading. On Feb. 1, the day Microsoft announced its bid, the shares fell 6.6 percent, their largest decline since April 2006.

Board Nominees

The software maker could do more than borrow to expedite the takeover. Microsoft may seek to oust Yahoo's directors should they reject the bid and offer its own slate of nominees, according to a person familiar with the matter who asked not to be identified. The deadline for nominations is March 13. Microsoft spokesman Frank Shaw declined to comment.

Microsoft's cash pile peaked at $60.6 billion in the fiscal year that ended June 30, 2004, weeks before the company announced a $3-a-share onetime dividend on top of a regular dividend increase and a $30 billion four-year share repurchase plan.

By May 2006, with the $30 billion buyback allotment almost finished and almost $35 billion in cash still on the books, some shareholders demanded a buyback of $60 billion or more to be funded buy cash and debt.

That July, Microsoft announced a $20 billion regular repurchase program over five years combined with a onetime $20 billion tender offer for its shares. The tender offer was undersubscribed, so Microsoft boosted the regular buyback.

Credit-Default Swaps

Credit-default swap prices indicate that speculation started heating up last week that Microsoft would sell debt. On Feb. 1, CMA Datavision, a London-based credit-default swap pricing service, published its first Microsoft default swap price in more than a year.

The contracts rose to 15 basis points today, from 7.5 basis points on Feb. 1, according to CMA. An increase in the contracts, which investors use to speculate on a company's ability to repay its debt or to hedge against losses, signals investors see credit risk rising.

Yahoo's directors haven't responded to the takeover offer.

We trust the Yahoo board and the Yahoo shareholders will join with us quickly in deciding to move down an integrated path, Microsoft Chief Executive Officer Steve Ballmer said at today's conference.

Liddell said the company wanted to choose a price that would strike a balance between attracting Yahoo stockholders and allowing Microsoft to increase value for its own investors.

We think it's in our interest, in Yahoo's interest to resolve their future as quickly as possible, he said. Our thinking in striking what we consider to be an attractive price was to make it as attractive as possible to move quickly.

AQuantive Debt

Microsoft took on $80 million in debt from AQuantive Inc. when it bought the Internet advertising company for $6 billion in August. Both the AQuantive acquisition and the proposed takeover of Sunnyvale, California-based Yahoo are part of Microsoft's effort to compete with Google in the $40 billion-a-year market for Internet search services and advertising.

Separately, Microsoft said it completed a package of fixes to its Windows Vista PC operating system. Many corporations wait to adopt new operating systems until the release of what's called Service Pack 1, Ballmer told analysts. The company also finished work on its new Windows system for running server computers.

U.S. Stocks Drop on Bank Downgrades; Asia, Europe Shares Gain

U.S. stocks declined, paring the biggest weekly gain in five years, after analysts advised selling Wells Fargo & Co. and Wachovia Corp. on concern a recession will increase personal defaults and reduce consumer spending.

Wells Fargo and Wachovia, the fourth- and fifth-largest U.S. banks, dropped the most in two weeks as Merrill Lynch & Co. told investors they are overpriced. American Express Co., the third- biggest credit-card network, slumped after UBS AG said higher U.S. unemployment will reduce its profits. Concern spending will slow also dragged down retailers such as Tiffany & Co., the No. 2 luxury jewelry seller.

The Standard & Poor's 500 Index fell 7.3, or 0.5 percent, to 1,388.12 as of 11:21 a.m. in New York after rallying 4.9 percent last week. The Dow Jones Industrial Average, the best-performing benchmark among indexes in the 20 biggest markets last month, decreased 43.57, or 0.3 percent, to 12,699.62. The Nasdaq Composite Index retreated 12.08, or 0.5 percent, to 2,401.28. About two stocks declined for every one that advanced on the New York Stock Exchange.

If economic growth is slowing, there may not be that much demand for borrowed money, said John Carey, who oversees about $13 billion at Pioneer Investment Management in Boston. The financial stocks make up a significant part of the market and facilitate a lot of other business transactions.

The losses came as stocks in Europe and Asia advanced, helped by takeover speculation. The Dow Jones Stoxx 600 Index of European shares rose 0.1 percent after U.K. pub owner Mitchells & Butlers Plc received a merger proposal and Fortescue Metals Group Ltd. said it held talks with strategic investors.

Higher Unemployment

Wells Fargo fell $1.74 to $31.91 and Wachovia dropped $2.31 to $36.45. Merrill Lynch lowered its recommendations on the stocks to sell from neutral, citing the latest Case- Shiller data which showed rapidly declining California real- estate values. They said the valuations of the companies did not fully discount earnings and recession risk in 2008.

Citigroup Inc. dropped 32 cents to $29.37, Bank of America Corp. slipped 45 cents to $44.58 and JPMorgan Chase & Co. declined 90 cents to $47.36.

American Express decreased $1.68 to $47.92. UBS analysts led by New York-based Eric E. Wasserstrom advised selling the shares because the recession will result in higher levels of unemployment in 2008-09, the primary driver of credit losses.

American Express is tied to small businesses and consumers in terms of spending, said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. That's an ongoing issue. This market is going to be choppy.

Credit Cards

Shares of other credit card companies decreased. Discover Financial Services slid $1.20 to $16.76. Capital One Financial Corp. dropped $4.24 to $52.73.

Humana Inc. lost $2.38 to $79.46. The No. 2 provider of U.S.-funded health benefits fell the most since August on investor concern the next president may cut insurance subsidies, according to Christine Arnold, an analyst with Morgan Stanley in New York. The speculation overshadowed a 57 percent rise in quarterly earnings.

KB Home plunged $2.35, or 8.2 percent, to $26.40. Chief Financial Officer Domenico Cecere sold 80,000 shares of the fifth-largest U.S. homebuilder, according to a filing with the U.S. Securities and Exchange Commission.

Dynegy Inc. gained 50 cents to $7.63, leading utilities shares higher. The owner of power plants in 13 U.S. states advanced after Barron's said the company's shares may double on increased cash flow and asset values.

Best Week

The decline in the S&P 500 followed the index's best weekly gain since 2003. The Federal Reserve's second interest-rate cut in two weeks, Microsoft Corp.'s $44.6 billion bid for Yahoo! Inc. and a plan to rescue bond insurers lifted equities.

The S&P 500 climbed 4.9 percent last week, trimming its yearly loss to 5 percent. The Dow average has fallen 3.9 percent and the Nasdaq dropped 9 percent in 2008.

Job cuts announced by U.S. employers jumped 19 percent in January from a year earlier as businesses attempted to rein in costs, according to a report by a private placement firm.

Announcements increased to 74,986 last month from 62,975 in January 2007, Chicago-based Challenger, Gray & Christmas Inc. said. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of monthly figures.

Companies may trim their workforce further as the worst housing slump in a quarter century threatens to push the economy into a recession, economists said. The report followed government figures last week that showed the U.S. lost jobs in January for the first time in more than four years.

Stocks also fell after orders to U.S. factories rose less than economists forecast. The orders increased 2.3 percent, the Commerce Department said, less than the 2.5 percent median forecast in a Bloomberg News survey.

U.S. Economy: Payrolls Decline for First Time in Four Years

The U.S. unexpectedly lost jobs for the first time in more than four years, increasing the odds the economy will fall into a recession and making it likely the Federal Reserve will cut interest rates another half point next month.

Payrolls fell by 17,000 in January after an 82,000 gain in December that was larger than initially reported, the Labor Department said today in Washington. None of the 80 economists surveyed by Bloomberg News predicted the decline.

Employment is one of the indicators, along with wages, production and sales, that help determine the start of economic contractions. The decline poses a further threat to consumer spending, which accounts for 70 percent of the economy, after households were already hurt by falling home and stock values.

It is highly unusual for payrolls to fall except in a recession, Christopher Low, chief economist at FTN Financial in New York, said in an interview. The Fed will have to keep cutting rates and we can expect a cut at the next meeting in March.

Odds of a half-point cut in the Fed's benchmark rate by the March 18 meeting rose to 78 percent from 68 percent late yesterday, according to April futures contracts quoted on the Chicago Board of Trade.

Manufacturers, state governments and construction companies lost jobs, while the healthcare and education industries added fewer workers than the month before. The jobless rate declined to 4.9 percent in January from 5 percent, the highest in two years.

`Red Flags'

Employment fell across a broad assortment of industries, said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. It raises a number of red flags for the economy. There is no question economic growth has slowed to a crawl and the risks of recession are significant. That is why the Fed has cut interest rates so aggressively.

Treasuries erased losses after the report, with yields on benchmark 10-year notes at 3.57 percent at 9:11 a.m. in New York, from as high as 3.66 percent earlier today.

The drop in payrolls in January was the first since August 2003. The median forecast was for a payrolls gain of 70,000, compared with an initially reported gain of 18,000 in December. Forecasts of an increase ranged from 5,000 to 160,000.

Fed policy makers lowered their benchmark rate by a half- point two days ago, after an emergency reduction of three- quarters of a point Jan. 22, the fastest easing of monetary policy since 1990. Chairman Ben S. Bernanke and his colleagues are next scheduled to gather March 18.

Data Revisions

Revisions for November and December brought total job gains for the two months to 142,000, versus a previously reported 133,000.

Service industries, which include banks, insurance companies, restaurants and retailers, added 34,000 workers last month after an increase of 143,000 jobs in December. Retail payrolls rose 11,200 after a decline of 12,000 in December.

Factory payrolls dropped by 28,000 after falling 20,000 a month earlier. Economists had forecast a drop of 20,000 in manufacturing employment. Builders trimmed payrolls by 27,000 in January.

Government payrolls shrank by 18,000 during January, the first decline in six months, after rising 28,000 in December.

Today's report showed the first drop in the average work week since July. Average weekly hours worked by production workers slipped to 33.7 from 33.8. That helped bring average weekly earnings down 42 cents to $598.18.

Earnings Slow

Hourly wages rose less than forecast, increasing 4 cents, or 0.2 percent, on average to $17.75 in January. Wages were up 3.7 percent from a year earlier, the same as in December. Economists had expected a 0.3 percent increase for the month and 3.9 percent for the 12-month period.

The deepest housing recession in a quarter century has dragged down home construction for the past two years, hurting demand for building materials and appliances and prompting firings at construction, mortgage-finance and other housing- related industries.

Home Depot Inc., the world's largest home-improvement retailer, yesterday said it fired 500 workers at its Atlanta headquarters, or about 10 percent of the staff there, to focus resources on its stores, a spokesman said.

We're operating in a tough business environment, and we expect that to continue into 2008, said spokesman Ron DeFeo.

Seasonal Adjustments

With today's report, the Labor Department revised the payroll numbers after reviewing more complete tax data not available earlier from state unemployment insurance programs and making adjustments to its estimates of seasonal hiring patterns.

The revision subtracted 376,000 jobs from the previous estimate for the year ended December 2007, bringing total job growth for the period to 1.137 million.

Growth in the fourth quarter slowed to a 0.6 percent pace, compared with a 4.9 percent rate in the previous three months, the government said this week. Consumer spending weakened to a 2 percent pace in the last three months of 2007 from a 2.8 percent rate in the third quarter.

Today's Labor Department figures ran counter to a private report Jan. 30 that suggested hiring rebounded last month. Companies hired 130,000 additional workers in January, according to data compiled by ADP Employer Services. The figures include only private employment and don't take into account hiring by government agencies.

According to the Labor Department report, private employers added 1,000 jobs in January.