Indices slide on oil's drop; Microsoft up late

NEW YORK (Reuters) - U.S. stocks fell sharply on Thursday as a drop in oil prices hit shares of energy companies, including Exxon Mobil Corp. <XOM.N>, and investors tried to lock in profits a day after the Dow Jones industrial average hit an all-time high.

Investors were nervous about corporate earnings growth, which is expected to slow in the fourth quarter, after more than four years of double-digit gains. Microsoft Corp. <MSFT.O> fell 2.1 percent as investors sold the software maker's stock before its quarterly earnings report.

Also weighing on the market, a report showed sales of existing homes took their biggest tumble in 17 years in 2006, and bond yields jumped to their highest level since August after a five-year Treasury note auction attracted only lukewarm interest.

"It's just a reversal from yesterday," said Tim Smalls, head of U.S. stock trading at brokerage Execution LLC in Greenwich, Connecticut. "The market did not like the housing numbers and I think earnings growth is slowing so that's a reason for the profit taking."

The blue-chip Dow average and the S&P 500 suffered their steepest one-day percentage declines since late November.

The Dow Jones industrial average <.DJI> dropped 119.21 points, or 0.94 percent, to end at 12,502.56. The Standard & Poor's 500 Index <.SPX> slid 16.23 points, or 1.13 percent, to finish at 1,423.90. The Nasdaq Composite Index <.IXIC> fell 32.04 points, or 1.30 percent, to close at 2,434.24.

As a proxy for interest rates, higher bond yields can signal higher borrowing costs for companies. That trend worries stock investors because higher rates can dampen corporate profits.

"Bonds have broken out of the upper end of the recent range in terms of a yield and that's proving a bit alarming," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "You've also had the price of oil down $1, which is having a negative effect on a number of energy components in the S&P."

The benchmark 10-year U.S. Treasury note <US10YT=RR> was down 16/32, with the yield at 4.88 percent, the highest intraday level since it struck 4.88 percent in mid-August.

U.S. crude oil for March delivery <CLc1> fell $1.14 to settle at $54.23 a barrel amid profit-taking and ample U.S. oil inventories.

Exxon Mobil Corp. <XOM.N> was the top weight on the S&P 500, falling 1.8 percent, or $1.38, to $73.52 on the New York Stock Exchange. Exxon was the second-biggest drag on the Dow.

MICROSOFT REBOUNDS AFTER THE BELL

In regular trading, Microsoft shares fell 64 cents to close at $30.45 and were the heaviest weight on the Nasdaq.

But the stock turned around after the close as the software maker posted quarterly earnings that topped Wall Street's estimates, driven by sales of database software and its Xbox 360 game console. Microsoft also raised its full-year profit target.

In extended-hours electronic trading, Microsoft shares rose 2.8 percent to $31.31 -- not far below their high for the year reached earlier this month.

In contrast, shares of Amgen Inc. <AMGN.O>, the world's largest biotechnology company, slid almost 3.3 percent to $72.30 after the closing bell. The price drop followed Amgen's earnings report, which showed a profit just shy of analysts' estimates and disappointing clinical trial results. The stock had closed on Nasdaq at $74.85, down 0.4 percent, or 29 cents.

BOEING AND AIG FALL

In the regular session, shares of Dow component Boeing Co. <BA.N> declined 1.6 percent, or $1.44, to $86.16 on the NYSE after the company said it will not use a wireless network to deliver in-flight entertainment on its 787 "Dreamliner" plane. Investors are on edge about any sign that Boeing will emulate rival Airbus in delaying deliveries of its revolutionary aircraft. Boeing led the Dow lower.

Also pressuring the Dow, shares of American International Group Inc. <AIG.N> fell 1.4 percent, or 99 cents, to $68.89 on the NYSE after the world's largest insurer said it wants to buy the outstanding 38.1 percent of 21st Century Insurance Group <TW.N> that it doesn't already own.

Shares of 21st Century surged 26.2 percent, or $4.34, to $20.93 and ranked as the NYSE's biggest percentage gainer.

A bright spot was offered by online marketplace eBay, whose shares jumped 8.2 percent, or $2.45, to $32.45 on Nasdaq, recording their biggest one-day gain in eight months, a day after the company reported earnings that topped Wall Street's expectations.

Trading was active on the New York Stock Exchange where about 1.76 billion shares were traded, below the 1.84 billion daily average for last year. On Nasdaq, about 2.28 billion shares traded, above the 2.02 billion daily average last year.

Declining shares beat advancing shares by a ratio of about 3 to 1 on the NYSE, and on the Nasdaq, by about 7 to 3.

(Additional reporting by Caroline Valetkevitch)