US STOCKS-Dow drops on rate concern, Nasdaq flat

(Updates to midday)

By Emily Chasan

NEW YORK, Jan 26 (Reuters) - U.S. blue-chip stocks slipped on Friday as a pair of stronger-than-expected economic reports stirred concern about the outlook for inflation and monetary policy, while the Nasdaq was little changed after a strong profit outlook from Microsoft Corp. (MSFT.O: Quote, Profile, Research, Stock Buzz)

Transportation and airline stocks also sank, hurt by a sharp rise in crude oil prices. But a gain in energy stocks, including Exxon Mobil Corp. (XOM.N: Quote, Profile, Research, Stock Buzz), helped offset that decline.

Government reports showed stronger-than-expected new-home sales and durable goods orders last month, which raised speculation that the Federal Reserve will not cut interest rates as soon as some investors had hoped. Yields on benchmark U.S. Treasury debt held near 5-1/2-month highs, adding to interest rate fears. For details, see [ID:nN26364880]

"Trading is going to be choppy," said Michael Alpert, managing director and portfolio manager at J.& W. Seligman & Co. in New York. "The housing numbers were good ... and I think the market is just seeing interest rates tick up, and there's so much uncertainty that it makes it really hard to make a trading decision."

The Dow Jones industrial average .DJI was down 48.07 points, or 0.39 percent, at 12,454.49. The Standard & Poor's 500 Index .SPX was down 4.14 points, or 0.29 percent, at 1,419.76. The Nasdaq Composite Index .IXIC was down 1.32 points, or 0.05 percent, at 2,432.92.

The benchmark 10-year U.S. Treasury note <US10YT=RR> was up 2/32, with the yield at 4.8712 percent.

An upbeat earnings forecast from Microsoft Corp. (MSFT.O: Quote, Profile, Research, Stock Buzz) pushed its stock up 1.7 percent to $30.97. The software maker reported quarterly profit fell after Thursday's close, but its results beat Wall Street's expectations and the company raised its full-year profit target. [ID:nN25460186]