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Dow closes down nearly 500 points

New York_Wall Street sank into a deeper depression Tuesday, extending its heavy losses as enthusiasm over Federal Reserve efforts to inject confidence into credit markets gave way to concerns about financial companies' balance sheets. Trading remained fractious, with the Dow Jones industrial average losing more than 300 points.

Federal Reserve Chairman Ben Bernanke warned in a speech Tuesday that the financial crisis could prolong the difficulty the economy is facing. Some traders appeared to regard his remarks as a sign that an interest rate cut could be in the offing, but that did not stanch the losses that built on Monday's huge drop.

Investors appeared initially heartened but still very cautious following the Fed's announcement that it plans to buy massive amounts of corporate debt to jump-start lending in the markets where many companies turn for short-term loans. The evaporation of faith that loans will be repaid has lenders weary and is making it more difficult and expensive for businesses and consumers to borrow.

Credit markets showed some signs of easing as demand for safe-haven investments decreased. Credit markets seized up last month after Lehman Brothers Holdings Inc. declared bankruptcy and the government stepped in to rescue insurer American International Group Inc.

The Fed's latest move is designed to lubricate the lurching credit markets whose troubles have spread to other parts of the economy. Still, the measure stops short of a broad interest rate reduction that some investors say is necessary to restore confidence in the market. Other market watchers argue, however, that more focused steps like Fed's decision to buy commercial paper are what's needed.

But some investors remain worried about financial companies like Bank of America Corp., which after the closing bell Monday slashed its dividend and reported that its third-quarter profit fell 68 percent. The stock fell $6.18, or 19 percent, to $26.04 and was the steepest decliner among the 30 stocks that comprise the Dow industrials.

And a rumor that Mitsubishi UFJ Financial Group Inc. was pulling out of a deal to acquire up to 24.9 percent of the voting shares of Morgan Stanley sent the investment bank's stock tumbling $5.40, or about 23 percent, to $18.10.

Investors are fearful that financial companies will continue to face cash shortages even with efforts in Washington and by other governments to resuscitate lending.

"I think we have weeks of volatility ahead of us," said Kim Caughey, equity research analyst at Fort Pitt Capital Group.

She said the write-downs of bad debt at Bank of America are a reminder to investors that troubles within the financial sector remain.

The concerns weighed on stocks after Monday's rout. In late afternoon trading, the Dow fell 382.79, or 3.85 percent, to 9,572.71, after dropping just over 400 points. The drop came a day after the blue chips fell below 10,000 for the first time in four years. The Dow skidded as much as 800 points on Monday before finishing with a loss of 370.

Broader indexes also fell. The Standard & Poor's 500 index declined 46.75, or 4.42 percent, to 1,010.14, while the Nasdaq composite index fell 82.95, or 4.45 percent, to 1,780.01.

The dollar was mixed against other major currencies, while gold prices fell.

Oil prices rebounded after plunging Monday to an eight-month low on concerns a global recession will undermine demand for crude. Light, sweet crude rose $1.25 to $89.06 a barrel on the New York Mercantile Exchange.

Concerns about the credit markets still fed demand for the relative safety of government debt, though pressures eased. The yield on the three-month Treasury bill, which moves opposite its price, rebounded to 0.88 percent from 0.50 percent late Monday. Demand for short-term Treasurys remains high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place.

Some investors moved into longer-term Treasury bonds, which while still safe don't draw as much demand as shorter-term debt in times of fear. The yield on the 10-year note fell to 3.49 percent from 3.50 percent late Monday.

Investors are still hoping to see other moves from the Fed to boost confidence. Australia's central bank lowered interest rates by the largest amount since 1992 in a surprise move, and that reignited hopes that others, including the Fed and European Central Bank, might follow suit.

Though not giving the market a rate cut, the Fed has taken other steps to help unclog the credit markets. On Tuesday, policymakers provided more details about when it will make $900 billion in short-term loans available to squeezed banks.

The loans are made available to banks through auctions. The Fed, in coordination with other countries' central banks engaged in similar efforts, laid out dates that it will conduct the auctions through the rest of this year.

"The Treasury stepping into the commercial paper market is good news," said Peter Cardillo, chief market economist for Avalon Partners. "The Fed is doing everything they can to have confidence return to the markets, and maybe an interest rate cut is next. The central bank is doing what it should be doing as a lender of last resort."

Minutes from the Fed's last meeting described a U.S. economy that was slowing considerably and credit markets that were deteriorating rapidly. The meeting was held Sept. 16, the day after the failure of Lehman Brothers. The central bank's Open Market Committee found the risks from weaker growth and higher inflation were roughly equal; that was its rationale for leaving rates unchanged. Policymakers, who will meet again at the end of the month, left key interest rate unchanged at 2 percent.

Technology stocks saw some support after chip maker Advanced Micro Devices Inc. said it will spin off its manufacturing businesses into a new venture with Abu Dhabi-backed Advanced Technology Investment Co. AMD said the deal will dramatically cut costs and allow it to better compete with chief rival Intel Corp. AMD jumped 77 cents, or 18 percent, to $5. Intel slipped 17 cents to $16.76.

Wall Street is also looking for Alcoa Inc. to unofficially kick off earnings season when it releases results after the closing bell. Alcoa rose 10 cents to $18.21.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange where volume came to 966.8 million shares.

The Russell 2000 index of smaller companies fell 24.98 or 4.19 percent, to 570.93.

Overseas, Japan's Nikkei stock average fell 3.03 percent. Britain's FTSE 100 rose 0.35 percent, Germany's DAX index fell 1.12 percent, and France's CAC-40 rose 0.55 percent.

© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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