Market edges up; rate outlook offsets credit worry

NEW YORK (Reuters) - Stocks edged up on Friday as expectations of an interest rate cut offset a warning by Merrill Lynch that revived concerns about credit conditions and the impact of the weak U.S. housing market.

Indexes ended higher for the week, with the Dow posting its best week since April 22.

Keeping the global credit squeeze at the forefront of investors' concerns, Merrill Lynch & Co Inc MER.N said it has adjusted the value of securities linked to risky subprime mortgages and other products. Merrill, the world's largest brokerage, said the move could hurt its third-quarter profits.

Even so, financial stocks held their own, with the Federal Reserve widely expected to cut interest rates at its policy meeting on Tuesday.

"The possibility of a rate cut" is helping the market, said Edgar Peters, chief investment officer & director, asset allocation at Boston-based PanAgora Asset Management Inc. At issue for the market is whether the Fed will cut its benchmark lending rate by 25 or 50 basis point. "It could go either way, but it certainly seems" as if the market is expecting a 50-point cut.

The Dow Jones industrial average .DJI was up 17.64 points, or 0.13 percent, at 13,442.52. The Standard & Poor's 500 Index .SPX was up 0.30 points, or 0.02 percent, at 1,484.25. The Nasdaq Composite Index .IXIC was up 1.12 points, or 0.04 percent, at 2,602.18.

For the week, the Dow ended up 2.5 percent, while the S&P rose 2.1 percent and the Nasdaq gained 1.4 percent.

United Technologies Corp. (UTX.N) boosted the Dow industrials and S&P 500 after brokerage Sanford C. Bernstein upgraded the company's shares, citing the profit outlook for its Carrier air conditioner and Sikorsky helicopter units. The industrial conglomerate's stock rose 1.5 percent to $76.14.

The Dow Jones U.S. Aerospace & Defense Index rose 0.8 percent.

Shares of Intel Corp. (INTC.O) declined 1.7 percent to $24.93, weighing on both the S&P 500 and Nasdaq, after Merrill Lynch cut its rating on the No. 1 chip maker. The Philadelphia Stock Exchange index of semiconductors .SOXX was down 0.2 percent.

In another development in the financial sector, mortgage lender Northern Rock NRK.L of Britain received an emergency loan from the Bank of England and issued a profit warning.

Lehman Brothers Holdings Inc LEH.N, for which Northern Rock originates subprime loans, was down 0.3 percent at $59.50. Merrill shares fell 0.7 percent to $74.65 on the NYSE.

Stocks began the day lower, with government data showing retail sales, excluding vehicles, unexpectedly declined in August.

A separate report showed the preliminary consumer sentiment index inched up this month to 83.8 from 83.4 in August.

Trading was light on the New York Stock Exchange, with about 1.20 billion shares changing hands, well below last year's estimated daily average of 1.84 billion, while on Nasdaq, about 1.58 billion shares traded, down from last year's daily average of 2.02 billion.

Rising stocks were outnumbering falling ones by a ratio of about 17 to 14 on the NYSE and by 16 to 13 on Nasdaq.