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Market Turns Lower as Bank Rally Fizzles

Stocks turned lower Friday as an early bank rally fizzled and Google and Microsoft slammed techs.

Citigroup reported a smaller-than-expected $2.5 billion lossfor the second quarter, prompting at least one analyst to say "the worst may be over in the subprime mess," but it was no match for the crush of of Google and Microsoft.

Google and Microsoft were the biggest drag on major indexes after the companies' outlooks punctured the notion that these pillars of tech were immuneto the economic slump.

The tech-heavy Nasdaq was hit hardest, falling nearly 2 percent. The Dow Jones Industrial Average and S&P 500 index were off about half a percent.

Merrill Lynch shares skidded after the bank, which has been among the hardest hit by the credit crunch, reported a $4.9 billion loss -- more than double what analysts had expected and one of the worst in the investment bank's history. Merrill also said it is close to selling $8 billion of assets in a bid to raise fresh capital.

Financials had popped at the open, building on the prior session's rally, but the quick selloff was evidence that jittery investors still aren't ready to buy and hold. The CBOE volatility index slipped below 25.

Meanwhile, state-backed mortgage finance companyFreddie Mac is looking to shore up its balance sheet by selling as much as $10 billion in new shares, The Wall Street Journal reported, citing people familiar with the matter.

The U.S. Treasury and Federal Reserve launched a rescue effort for Freddie andFannie Mae last Sunday, assuring investors it would buy stock back if necessary and promising to raise the limit on government guarantees on their debt.

As consumers get pummeled by housing crisis and soaring prices at the pump, a survey by Reuters and the University of Michigan offered a striking revelation: More than half of consumers polled said they plan to accelerate paying off their debtand save more in the year ahead.

The numbers are backing that up: A government gauge of aggregate savings jumped to 5 percent in May, the biggest since March 1995, and the Fed's measure of household indebtedness versus income dropped to 14.13 in the first quarter, the lowest in two years.

It's a solid sign that individuals are getting their house in order but with consumers accounting for two-thirds of economic activity, it means a deepening slump for the economy in the second half of the year and in early 2009.

Light, sweet crude oil rebounded, climbing more than $1 to between $130 and $131 a barrel, after losing more than $7 this week.

Honeywell's second quarter profit rose 18 percent and the company, which makes everything from air purifiers to cockpit electronics, raised its forecast, citing strong demand for aircraft electronics and environment and security-control systems used in large buildings.

Yahoo shares slipped after Legg Mason, the Internet portal's second largest institutional shareholder, said it will back Yahoo's board, clashing with Carl Icahn and his plan to oust the board and elect a rival slate.

"We believe the current board acted with care and diligence when evaluating Microsoft's offers," Legg Mason said in a statement. The firm's portfolio manager Bill Miller said Icahn would have more support if he promised not to sell Yahoo below $33 a share, and urged Microsoft to make its offer public. "If Yahoo shareholders support it, I am confident the board of Yahoo will accept it," Miller said.