U.S. bailout plan passes, investors take profits

NEW YORK (Reuters) - Investors cut into a global stock market rally on Friday after the U.S. House of Representatives approved a $700 billion financial rescue plan, taking profits in a classic "buy the rumor, sell the news" move.

Uncertainty still dominated market psychology after the bill passed and U.S. President George W. Bush swiftly signed it into law. The Dow Jones industrial average had its worst week since July 2002 while the Standard & Poor's 500 and Nasdaq stock indexes recorded their worst weeks since September 2001.

A U.S. dollar rally also fizzled, but the greenback saw its best week in 16 years against a basket of currencies and versus the euro since its launch in 1999.

U.S. and European stocks had risen ahead of the expected passage of the legislation. A $16 billion purchase of troubled bank Wachovia Corp WB.N by Wells Fargo (WFC.N) also helped enliven sentiment and offset the biggest drop in U.S. payrolls in 5-1/2 years.

"It was expected to pass so from an equities perspective it was sort of 'buy the rumor, sell the news'," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

"Now we're back to the situation of, 'Is it enough? Is it going to work? Are people going to use it?'," he said.

The House passed the bill by a vote of 263-171 and President Bush quickly signed it, ending two weeks of haggling in Congress that roiled and captivated global markets.

An earlier attempt by the House on Monday to pass the bill, meant to underpin banks and other financial firms straining under bad mortgage-related assets, had failed and sent stocks careening lower.

"We're still in the thick of this. It is like turning a cruise ship. You can't do it on a dime," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

It was Wells Fargo's offer to buy Wachovia that gave a shot of optimism to investors that business was still getting done in the financial industry. Stocks rose in Europe and put the U.S. markets on solid footing at the open of trade. Asia's main stock markets had closed lower before the deal was announced.

In the U.S. stock market, benchmark indexes fell. The Dow industrials .DJI lost 157.47 points, or 1.50 percent, at 10,325.38. At its peak, the Dow was up 313 points. For the week the index lost 818 points, or 7.35 percent.

The S&P 500 Index .SPX fell 15.05 points, or 1.35 percent, at 1,099.23. For the week, the index dropped 9.38 percent, or 113.78 points.

The Nasdaq Composite Index .IXIC dropped 29.33 points, or 1.48 percent, at 1,947.39. For the week the Nasdaq lost 10.81 percent, or 235.95 points, its worst week since September 2001.

European share prices closed with solid gains before the bill passed. The FTSEurofirst 300 index .FTEU3 closed up 3.01 percent on the day. On the week, the index lost 1.4 percent. MSCI's main world equity index fell 0.48 percent on Friday .MIWD00000PUS.

Japan's Nikkei 225 index .N225 fell 1.94 percent to a three-year closing low for its worst week in more than a year.

GRIM ECONOMIC DATA

As the world's focus has been on the U.S. Congress, new data revealed America's economy continues to slow. On Friday, the Labor Department reported 159,000 nonfarm jobs were lost in September, a ninth straight monthly contraction, while the unemployment rate held at a five-year high of 6.1 percent.

"We've seen weaker data in history, but these look pretty decisively to be the beginning of something worse," said Pierre Ellis, senior economist at Decision Economics Inc in New York.

A second gloomy piece of economic data showed America's dominant service sector economy barely grew in September.

The Institute for Supply Management's non-manufacturing index came in at 50.2, marginally above the level of 50 that signals expansion, aided by a slight rise in new orders. The index was 50.6 in August.

Government bonds, which usually benefit from grim economic data, were overtaken by events and fell as stock prices rose.

Benchmark 10-year U.S. Treasuries cut a near 1-point loss in price to a 2/32 point gain, yielding 3.616 percent.

U.S. interest rate futures nearly price in a half-percentage-point cut in benchmark U.S. interest rates at the October 28-29 Federal Open Market Committee meeting, to 1.5 percent. Expectations had slipped a bit since late Thursday.

Euro zone government bond gains were wiped out by the stock market rally. The two-year Schatz yield was flat at 3.316 percent.

This week investors still sought the safety of the U.S. dollar, despite the turmoil created when the first version of the financial bailout plan was put to a vote on Monday.

In the wake of Friday's vote, the euro slipped 0.16 percent at $1.3794 from a previous session close of $1.3816. The U.S. dollar index .DXY was up 0.04 percent at 80.521, holding near a one-year high against a basket of major currencies.

Emerging sovereign debt spreads gyrated along with U.S. Treasury movements, widening by 6 basis points while emerging stocks .MSCIEF lost 2.61 percent, returning to an earlier two-year low.

Gold prices fell $0.35 or 0.04 percent to $834.65 an ounce. U.S. light crude slipped $0.81 to $93.16 a barrel.

(Additional reporting by Ellis Mnyandu, John Parry, Nick Olivari in New York; Ros Krasny in Chicago; Glenn Somerville in Washington; Natsuko Waki, George Matlock in London)