U.S. stocks rebounded from intraday lows but the major markets closed with small losses amid ongoing worries regarding the global credit environment.
"The conventional logic was that the worst was behind us but then reality set in and there's still trouble out there," said Dan McMahon, head of listed trading at CIBC World Markets. "It's just the tip of the iceberg as to how far this thing will trickle down and whether or not this is a real phenomenon or just fear."
McMahon said the equities markets have recently stabilized somewhat but trading volume has dried up this week as many investors are on vacation. McMahon expects volume to pick up after Labor Day.
"Everyone is waiting for the Fed to do something and there can always be another shoe to drop, you never know what someone is going to announce in terms of subprime, mortgage-related layoffs," he said. "That shoe could drop tomorrow but excluding that there isn't going to be much until September."
The Dow Jones Industrial Average ended the session essentially unchanged and remains on pace to log its best weekly performance since mid-July. The S&P 500 fell 0.1% while the Nasdaq Composite fell 0.4%.
"We kind of see some of the classic signs you find at an equity market low," said Andrew Burkly, market strategist at Brown Brothers Harriman. "We have a lot of fear here, a lot of oversold price momentum."
"We're telling clients we're seeing some light at the end of the tunnel but we're not out of the woods yet," said Tobias Levkovich, chief U.S. equity strategist at Citigroup. "There is still shaky confidence and if some bad news comes across the headlines it would shatter that slowly rebuilding confidence."
Mortgage lenders traded higher after Bank of America announced it would pour $2 billion into troubled lender Countrywide Financial.
Shares of Countrywide, which opened Thursday's session up 10%, pared some of their gains after CEO Angelo Mozilo told CNBC's Maria Bartiromo in an exclusive interview that the credit market environment is not improving and believes the housing slump will lead the economy into a recession.
But some market strategists such as Brown Brothers' Burkly disagreed with Mozilo's recession prediction.
"We've had pretty significant weakness and headwinds but if you look at the economy as a whole, the consumer is still doing pretty good and other areas of the economy still holding up," Burkly said.
The Federal Reserve added a total of $17.5 billion into the banking system in three separate operations, reminding investors that the credit crisis may not be over.
"The credit market continues to be a significant overhang," said Mike Malone, trading analyst at Cowen & Co. "There's still uncertainty about how the credit markets are going to play out."
Five of 10 economic sectors tracked by S&P ended higher, led by telecom and energy shares. The influential financial sector extended losses and weighed on the major averages. Home Depot was the biggest percentage loser on the Dow after news that the sale of its supply unit is in jeopardy of not closing today as scheduled.
Bank of America , the second-largest U.S. bank, said it bought non-voting preferred stock that can be converted into Countrywide common stock at $18 a share. The announcement followed recent moves by the Federal Reserve, including last week's cut in the discount lending rate, aimed at reducing the turmoil in the credit markets.
"These are the steps the Fed and the banks have to take to restore the commercial paper market, to restore the issuance of debt to corporations that need funding and to get liquidity back into the system," said Joe Battipaglia, market strategist at Stifel Nicolaus.
Butthe vote of confidence on U.S. mortgages was not echoed by Accredited Home Lenders, HSBC Holdings and Lehman Brothers, which all recently announced job cuts following losses caused by the subprime fallout.
Rising credit rates could halt a private equity-led buyout of Home Depot's wholesale supply division, which is due to close on Thursday, the Financial Times reported.
Treasury prices reversed course to trade higher, sending yields lower.
New York light sweet crude futures continued to trade below $70 a barrel after Thursday's news of increased U.S. crude oil stockpiles. The Energy Information Administration said natural gas inventories rose 23 billion cubic feet last week, less than traders were expecting.
In economic news, the number of people claiming unemployment benefits in the week ended August 18 fell by 2,000 to 322,000 claims, in line with expectations.
European Stocks Close Mostly Flat
European stocks pared earlier gains as the U.S. stock market lost steam to finish basically flat.
The London FTSE-100 closed flat, while the Paris CAC-40 and Frankfurt DAX finished with modest gains.
The European Central Bank helped to ease tight credit conditions in the euro interbank money market by lending 40 billion euros in three-month funds. About 146 banks bid for the ECB funds at an average rate of 4.61%.
In corporate news, T-Mobile in Germany, Orange in France and O2 in the U.K. secured contracts with Apple for exclusive rights to sell the new iPhone, the Financial Times reported Thursday, citing sources familiar with the situation.
Meanwhile, the race for bourse consolidation continued as Borse Dubai got the go ahead to bid for Sweden's OMX. The Swedish Financial Supervisory Authority cleared Borse Dubai of violating Swedish law when it announced it was buying shares in OMX before making a formal offer.
On the earnings front, first-half net profit at Switzerland'sHolcim nearly tripled, helped by the sale of a stake in its South Africa unit. The cement maker also said it would bid for a further 20% in India's Ambuja Cements.
And services group Rentokil Initial posted a 12.9% decline in first-half pretax profit, in line with its expectations.
Asian Stocks Higher
Asian stocks jumped Thursday as growing hopes the worst of the recent credit market storm may be past fueled appetite for riskier assets, hurting government bond prices and sending the yen down.
Tokyo's Nikkei 225 Average finished 2.6% higher as Canon and other blue-chip exporters surged on the yen's fall, while the market largely brushed aside the Bank of Japan's 8-1 vote decision to leave its key policy rate unchanged for the sixth month running. Bank shares rang up gains on easing concern about credit woes, while commodity-related shares including trading houses such as Mitsubishi and metal firms soared.
South Korea's KOSPI closed 2.3% higher, posting a fourth day of gains, as investors - though not all - grew optimistic that the global economy would weather the recent woes in credit markets. Exporters such as LG.Philips LCD rose, while a recovery in commodity prices bolstered firms such as steel maker POSCO.
Australia's S&P/ASX 200 Index advanced 2.6% as upbeat earnings boosted shares in BHP Billiton. The top miner posted a 19% jump in second-half earnings on surging metal demand. Investment firm Babcock & Brown also gained, while financial shares gained on receding worries about credit markets.
Singapore's benchmark Straits Times Index rose 1.7%, tracking gains on Wall Street and in line with rallies in other Asian markets. Leading the advance -- financials. Shares of DBS Group, United Overseas Bank and Oversea-Chinese Banking Corp were all sharply higher.
Hong Kong blue chips jumped 2.8% in heavy trade, lifted by Wall Street gains, as shares in the city's real estate developers raced up on growing hopes of a rate cut by the U.S. central bank. Investors bid up China Mobile to record highs on short-covering and expectations that mainland investors would put their money in the blue-chip wireless provider after China this week allowed direct, offshore investment by its citizens.
China's Shanghai Composite Index was over 1% higher and breached the key 5,000 level for the first time, led by property shares and speculative third-tier stocks.