Recession fears hit Wall Street but Fed cut helps

NEW YORK (Reuters) - Recession worries pushed stocks lower on Tuesday, but the decline was shallower than feared as an emergency interest-rate cut by the Federal Reserve helped stabilize global markets after a two-day rout.

The biggest reduction in the Fed's target lending rate in more than 23 years, announced about an hour before the U.S. stock market reopened after a long weekend, helped stem a global sell-off in equities that had chopped nearly $1 trillion off of investor wealth worldwide on Monday alone.

It was the fifth day of losses for the U.S. market and included a brief dip by the Nasdaq into bear market territory. And even at the close, all three indexes remained within the bear's grasp.

Analysts said declines could continue on Wednesday as a weaker-than-expected forecast by Apple Inc. (AAPL.O) hit shares of major technology companies after the closing bell.

The decline in the regular session was fairly broad-based, with Procter & Gamble Co (PG.N), the world's largest household products company, down 3 percent at $65.13, and Exxon Mobil (XOM.N), down 3.1 percent at $82.45, ranking among the biggest declining shares in both the Dow industrials and S&P 500.

But investors bought financial stocks, which benefit from lower borrowing costs, as well as retailers. The financial sector was among the S&P 500's major gainers, while retailers led the Dow's advancers.

"While people realize that (the rate cut) alone is not going to get us out of the woods, at least it was an attempt by the Fed to try to get a little more in front of the negativity as opposed to being reactionary," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

The Dow Jones industrial average .DJI was down 128.11 points, or 1.06 percent, at 11,971.19. The Standard & Poor's 500 Index .SPX was down 14.69 points, or 1.11 percent, at 1,310.50. The Nasdaq Composite Index .IXIC was down 47.75 points, or 2.04 percent, at 2,292.27.

The Dow closed below 12,000 for the first time since November 3, 2006, and trading was heavy, with New York Stock Exchange volume the fourth-highest on record.

After the bell, shares of Apple Inc (AAPL.O) fell 9 percent to $140.68 as the company posted a second-quarter profit outlook below Wall Street's estimates.

During the regular session, home builders also were in positive territory after the Fed cut interest rates by 75 basis points in an unusual decision between its regularly scheduled policy meetings. The Federal Open Market Committee is set to meet next Tuesday and Wednesday.

The U.S. central bank's move followed two days of steep losses in Asian and European equities on worries that a deteriorating U.S. economy would drag other regions down with it.

FEELING THE BEAR'S BREATH

The Dow was down almost 465 points at its session low, while the Nasdaq dipped briefly into what is typically considered bear market territory, falling more than 20 percent from its 52-week closing high set in October.

Even with the major indexes trimming some of the morning's steep losses, they still ended Tuesday's session close to bear market territory. The blue-chip Dow average ended down 15.5 percent from its October closing high above 14,000, while the S&P 500 finished down 16.3 percent from its October closing high, and the Nasdaq closed down 19.8 percent from its 2007 closing high, also set in October.

Overseas stock losses were sharp on Monday when U.S. markets were closed for the Martin Luther King Jr. holiday, and the rout resumed on Tuesday until the Fed rate cut, which helped Latin American markets to rise and allowed the pan-European FTSEurofirst 300 index .FTEU3 to end up 1.9 percent.

The Fed's action took the key federal funds rate, which governs overnight lending between banks, down to 3.5 percent, its lowest level since September 2005. The Fed also lowered the discount rate it charges on direct bank loans to 4 percent.

The price of U.S. oil futures dropped below $90 a barrel, weighing on Exxon Mobil and rivals.

HOME DEPOT SHINES, APPLE FALLS

The S&P index of retailers .RLX climbed 5.3 percent, the Dow Jones U.S. home construction index .DJUSHB gained 6.2 percent, while the S&P financial index .GSPF advanced 2.2 percent.

Only eight of the Dow's 30 components finished higher, with two retailers leading this short list: Home Depot (HD.N), up 7.3 percent at $28.20, and Wal-Mart Stores Inc (WMT.N), up 3.3 percent at $49.15 on the New York Stock Exchange.

Apple, the iPod and iPhone maker, ended the regular session down 3.5 percent at $155.64, and was the heaviest weight on the Nasdaq. Other tech shares falling after the close included Google Inc. (GOOG.O) and Yahoo Inc (YHOO.O)

About 2.59 billion shares changing hands, above last year's estimated daily average of roughly 1.9 billion, while on the Nasdaq, about 3.11 billion shares traded, exceeding last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by a ratio of about 9 to 7 on the NYSE and by about 17 to 9 on Nasdaq.

(Additional reporting by Jennifer Coogan; Editing by Jan Paschal)