Energy lifts Dow and S&P but credit worries remain

By Steven C. Johnson

NEW YORK (Reuters) - The Dow and S&P 500 rose on Thursday as surging oil prices drove up energy shares, though fresh fears of more credit losses on Wall Street kept gains modest and pushed the Nasdaq into negative territory.

U.S. crude oil jumped more than $5 a barrel on rising tensions between the United States and energy behemoth Russia and the weaker dollar. Shares of Exxon Mobil (XOM.N) rose 2 percent and were one of the biggest boosts on the Dow and S&P.

Bank shares struggled for much of the session as analysts predicted more mortgage-related write-downs on Wall Street.

"Oil stocks had fallen quite sharply during the decline, so there's a bit of a relief rally going on right now," said John Praveen, chief investment strategist at Prudential International Investment Advisers in Newark, New Jersey,

Crude oil had dipped below $113 a barrel earlier this month after soaring to a record high above $147 in mid-July.

The Dow Jones industrial average .DJI was up 12.62 points, or 0.11 percent, at 11,430.05. The Standard & Poor's 500 Index .SPX was up 3.17 points, or 0.25 percent, at 1,277.71. The Nasdaq Composite Index .IXIC was down 8.70 points, or 0.36 percent, at 2,380.38.

Energy shares rose with the price of oil. Chevron (CVX.N) rose 2.4 percent to $88.52 and Exxon Mobil (XOM.N) advanced 2 percent to $80.35. The Standard & Poor's Energy Index rose 2.3 percent.

Home finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) came back from earlier losses of about 20 percent as growing speculation of an imminent government bailout forced investors to buy back shares to exit bets on a further decline.

"Those stocks have been pounded. When they consolidated, I think you had a lot of shorts that were willing to cover," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "People were saying, 'Let's not get too greedy here.'"

The two companies, which own or guarantee about half of outstanding U.S. mortgages, are considered a pillar of the U.S. housing market, and investors are eager to see what sort of rescue they might get from the government.

Fannie shares rose 10.2 percent to $4.85 while shares of Freddie Mac dipped 2.8 percent to $3.16.

Other financial shares were lower, with the S&P Financial index .GSPF down 1.1 percent. JPMorgan Chase lost 2 percent to $36.26 while American International Group (AIG.N), the world's largest insurer, slid 4.9 percent to $19.78 amid a slew of negative reports on the financial sector.

The financials were hit after Citigroup analyst Prashant Bhatia widened his third-quarter loss estimate for Lehman Brothers LEH.N and cut his quarterly earnings view for Goldman Sachs (GS.N) and Morgan Stanley (MS.N).

But financial shares pared losses, analysts said, led by Lehman Brothers LEH.N after Ladenburg Thalmann & Co analyst Richard Bove raised his rating on Lehman to "buy" from "neutral," saying the investment bank may become a hostile takeover target.

"Talk of a possible Lehman takeover was one of the catalysts for the turnaround. It looks like there is some bottom-fishing going on," said Praveen.