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)

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), 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) 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]

That reinforced confidence in large technology stocks, after investors had been disappointed by earnings reports outlooks from other big tech companies last week. Shares of Web search leader Google Inc. (GOOG.O) rose 1.4 percent to $495 and were the second-biggest positive influence on the Nasdaq 100, after Microsoft. Shares of software maker Oracle Corp. (ORCL.O) rose 1.2 percent to $17.18 and were the third-biggest positive influence on the Nasdaq 100.

Crude oil prices rose nearly 2 percent as a cold snap in the Northeast boosted demand for heating oil. Crude for March delivery CLc1 was up 92 cents at $55.15 a barrel.

Exxon Mobil shares were up 0.5 percent at $73.90 and helped limit the Dow's decline.

The Dow Jones Transportation Average .DJT was down 1.2 percent, led by declines in Continental Airlines (CAL.N) and FedEx Corp.(FDX.N), as investors worried that high energy costs would eat into transportation companies' profits. Continental shares slid 3.6 percent to $40.77, while FedEx shares dropped 1.2 percent to $109.26.

Dragging on both the Nasdaq and the S&P 500 was Amgen Inc. (AMGN.O). The world's largest biotechnology company posted a marginal increase in quarterly profit, but also reported disappointing clinical trial results for cancer drugs after Thursday's close. Its stock was down 4.8 percent at $71.27 [ID:nN26231356]