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Stocks Close Lower As Rate Jitters Trigger a Broad Selloff

Stocks closed lower as investors used rising bond yields and diminished outlook for an interest rate cut as excuses to take profits.

"Technically, the market looks a lot like it looked before the 5% correction we got back in late February," said John Kattar, chief investment officer with Eastern Investment Advisors. "The market is overbought, so it would not be surprising to see a correction."

The selloff was broadly based with all of the S&P 500 sectors trading lower. The utilities sector led the downward trend along with telecom stocks. Declining shares outpaced advancers on the New York Stock Exchange by about three to one.

"You've got an awfully stretched market with the bond market rates edging up, and that's got a lot of people worried," Michael Metz, chief investment strategist at Oppenheimer, told CNBC.com. "There's too much complacency in this market and its way overdue for a correction. Having one now is better than later."

After the Dow dropped more than 100 points, stocks settled to trade in a narrow range. Some analysts were calling the dip a buying opportunity.

"What we're seeing today is just things we've been seeing for the last several weeks," said David Stepherson, portfolio manager at Hardesty Capital Management. "Bernanke has been positive on growth and hawkish on inflation. I still think U.S. stocks, as measured by the S&P 500, are relatively cheap. We think there's still 5% to 10% upside before the end of the year."

Treasury prices fell, sending the yield on the benchmark 10-year note to its highest level in nine months.

"Stronger economic data and a further rise in bond yields have led to profit-taking," Michael Sheldon, chief market strategist at Spencer Clarke LLC, told CNBC.com. "The question over the near-term is what happens to equity markets if bond yields continue to rise over that psychologically important 5% level? There's a strong likelihood that equity prices may consolidate here before moving higher later in the summer."

Strong economic data and continued concerns about inflation from the Fed Chairman helped to squash hopes for an interest rate cut anytime soon. Goldman Sachs changed its rate forecast to no Fed cut this year. Economists at the brokerage firm had called for a cut of 75 basis points this year.

The May non-manufacturing ISM report, measuring activity in the services sector, came in higher than expected at 59.7. Analysts surveyed by CNBC and Dow Jones were expecting the index to be 56, which is above the break even point of 50, but in line with the previous months results. The better-than-expected results renewed inflation concerns among some investors.

Speaking at the International Monetary Conference in Cape Town, South Africa, Bernanke predicted the conomy will rebound from its anemic performance at the beginning of this year, even if the housing slump continues.

However, the Fed Chairman also said the real estate slump will probably drag on the economy somewhat longer than previously expected. Bernanke also reiterated his concern that core inflation remains somewhat elevated despite improvements. Shares of Dupont fell after the company was downgraded by Lehman Brothers to an equal weight rating from overweight. Lehman cited valuation and historical underperformance by the stock in the summer season.

Shares of Bed, Bath & Beyond fell after the retailer issued its first-ever profit warning as a public company. Goldman Sachs downgraded the stock to neutral from buy.

Cache also issued a warning, saying second-quarter earnings would miss an earlier forecast due to a 2% decline in same-store sales in May.

On a bright note, Google hit an all-time intraday high after announcing an anticipated deal with Salesforce.com. Stifel raised its price target on the stock to $620.

Another bright note was Apple , which rose after Credit Suisse raised its price target on the stock to $140 from $120, saying that the profits from iPhone sales will be significantly more than anticipated.

There was yet more merger and acquisition news as telecom leader Avaya agreed to be taken over by private equity firmsTPG Capital and Silver Lake for $8.2 billion.

Also on the M&A front, News Corp.'s Rupert Murdoch said a meeting with theDow Jones-controlling Bancroft family about its $5 billion offer for the news provider was "productive," to the assembled media. But billionarie Ron Burkle has joned the employees union exploring alternatives for Dow Jones, according to the Wall Street Journal.

And speculation that Citigroup could bid $60.75 a share for Commerzbank lifted the German bank's stocks, although it declined to comment on rumors, Reuters reported.

New York light sweet crude futures fell below $66 a barrel amid easing concerns about a cyclone approaching the Persian Gulf.

European Shares Close Lower

Investors remained on the sidelines of European markets Tuesday, with few reasons for big bets ahead of this week's interest-rate decisions for Europe and the U.K.

The London FTSE-100, Paris CAC-40 and Frankfurt DAX all finished lower.

Economists expect the European Central Bank to hike its core interest rate to 4% from 3.75% when it meets at 12:45 pm London time Wednesday. The Bank of England is expected to raise rates by a quarter point to 5.75%, when it meets on Thursday at 12 pm.

In corporate news, shares of Ryanair slumped, despite posting strong full-year earnings, as CEO Michael O'Leary hit out at the European Commission, which is expected to block the low-cost carrier's attempt to buy Aer Lingus.

"We now expect the European Commission will block the Aer Lingus bid, which will be … a totally politically motivated prohibition," O'Leary told "Squawk Box Europe."

And London-listed Royal Bank of Scotland was upbeat on reaching its earnings forecasts and said it expects its U.K. bad-debt costs to fall in the first half of 2007. Shares in bank gained.

Asian Markets Mixed

Asian markets were mixed as the Shanghai Composite index reversed losses to gain 2.6%, easing fears that the slump in Chinese stocks may lead to a steep correction in regional markets and spill over to U.S. and European shares.

Australian stocks finished lower as losses in China's stock market triggered profit-taking in recent gainers such as the top banks, while wholesaler Metcash dropped on a disappointing 2008 growth outlook. But firmer oil and base metal prices lifted resource stocks such as BHP Billiton and Woodside Petroleum , capping losses in the overall market.

Tokyo's Nikkei 225 Average closed above the psychologically important 18,000 level for the first time in three months as Tokyo got support from energy
stocks such as Nippon Oil after oil prices rose. Exporters also rose after stocks gained in the United States, one of the biggest markets for Japanese goods.

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