Stocks recovered most of their losses and were mixed in the final hour of trading as oil prices pulled back toward $126 a barrel.
US Light-Sweet Crude closed at a record $126.29 but was well off its intraday record $127.82 after the Bush Administration agreed to suspend buying oil for the Strategic Petroleum Reserve for six months.
Goldman Sachs, the most active brokerage in energy markets, on Friday raised its forecast for oil to hit $141 a barrel in the second half of this year. Goldman rattled the market less than two weeks ago, when it projected oil prices between $150 and $200 a barrel in the next two years.
Crude's recent surge has propelled energy stocks to historic highs. ExxonMobil and Chevron were the top two gainers on the Dow Jones Industrial Average.
Financial stocks were some of the day's biggest decliners, with American Express and Citigroup leading the Dow lower.
Lehman Brothers tumbled amid news that long-anticpated layoffs at the brokerage are set to begin next week. The company is expected pare its workforce by 5 percent.
Technology stocks, which were the day's biggest advancers on Thursday, retreated.
Some news swirling around Internet target Yahoo : Billionaire investor Carl Icahn is launching a proxy fight for Yahoo that could bring Microsoft back to the table. On Thursday, Icahn's move was backed by hedge fund Paulson & Co., which owns 50 million Yahoo shares. Meanwhile, reports suggested that Yahoo is still hoping to secure a search-advertising deal with Google, and could announce it in the next week.
Stocks were pushed lower earlier in the session after the Reuters/University of Michigan consumer-sentiment index fell to a 28-year low.
Meanwhile, Housing starts jumped 8.2 percentin April to an annualized rate of 1.032 million units, following a nearly 14-percent drop in March; economists had expected the gauge to slide again. Building permits also rose
Homebuilders declined after an earlier boost from the report. Toll Brothers and KB Home both retreated.
The encouraging housing report comes a day after leaders of the U.S. Senate Banking Committee agreed to the underpinnings of a housing-rescue plan that will create a federal backstop for failing loans, Reuters reported.
The plan would create a $300 billion mortgage insurance fund administered by the Federal Housing Administration and a new regulator for Fannie Mae and Freddie Mac, the two largest sources of mortgage finance in the U.S.
Lockheed Martin won a potential $3.6 billion contract to start building a new generation of global positioning satellites that will boost accuracy for worldwide users, the Air Force said Thursday.
And Genentech said on Thursday a trial of Avastin in colon cancer patients who have undergone surgery will be completed earlier than expected due to faster collection of data and a higher-than-planned number of patients with stage III cancer.
Oil prices pushed retail stocks lower but there were a few bright spots from earnings that came in better than expected.
High-end retailer Nordstrom reported its profit slipped but beat expectations. However, the company lowered its outlook.
Teen retailer Abercrombie & Fitch reported earnings of 69 cents a share, surpassing forecasts, and backed its outlook for the second quarter.
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