Dow Slumps Despite Fed's Cash Infusion

Blue Chips Close Below 13,000 For First Time in Four Months

NEW YORK, Aug. 15 -- Ongoing credit market woes sent stocks sharply lower Wednesday despite positive economic data and a $7 billion injection from the Federal Reserve.

A sell-off that began Aug. 9 has left the Dow Jones industrial average down 8 percent from its record close of 14,000.41 on July 19. The Dow shed 167.45, or 1.3 percent, to 12,861.47, closing Wednesday below 13,000 for the first time since April 24.

The Standard & Poor's 500-stock index, a broader measure, hit a five-month low and is in negative territory for the year. The S&P lost 19.84, or 1.4 percent, to 1406.70. The tech-heavy Nasdaq fell 40.29, or 1.6 percent, to 2458.83. The Nasdaq is off by nearly 10 percent from recent highs but is up 2 percent for the year.

The Dow was up in early trading by as much as 90 points, helped by the Fed's $7 billion infusion into the financial system, which brought the total since Aug. 9 to $71 billion. The Fed added $24 billion Aug. 9, $38 billion Friday and $2 billion Monday; no action was taken Tuesday.

A tame monthly inflation report also helped the morning rally. The Labor Department reported that the consumer price index increased 0.1 percent in July on a seasonally adjusted basis. Core inflation, which excludes volatile food and energy prices, rose 0.2 percent.

Bad news continued to come from the mortgage and financial sector. Merrill Lynch raised the possibility that Countrywide Financial, the biggest U.S. mortgage lender, would be forced into bankruptcy. The National Association of Realtors, meanwhile, said prices for sales of existing homes increased from April to June in 97 of 149 cities surveyed.

Problems in the mortgage and credit industry "will hold back sales temporarily," as lenders tighten standards and shun the risky subprime loans that have contributed to the turmoil in credit markets, said Lawrence Yun, chief economist at the Realtors group. "But the fundamental momentum clearly suggests stabilizing price trends in many local markets."

Major stock indicators in Asia fell 2 to 3 percent overnight, and major indicators in Europe closed generally lower.

[Markets in Asia continued their decline Thursday, with South Korea's main benchmark down more than 7 percent and Japan's Nikkei 225 down 2.6 percent in morning trading, according to an Associated Press report.]

The strength of the global economy, cited by Wall Street analysts as a big reason why the United States would probably avoid a recession, showed signs of fraying. The European market declines were fed in part by disappointing figures released Tuesday showing a slowdown in the European Union's economic growth.

In the past three months, the economy in the 13 E.U. countries that use the euro grew 2.5 percent, down from 3.1 percent growth in the first quarter, said Eurostat, the E.U.'s statistical office. For the entire 27-member E.U., second-quarter growth was 2.8 percent, compared with 3.3 percent in the first quarter. E.U. officials blame the slower growth on lower industrial output.

Movers

KKR Financial fell $4.76, to $10.52. The specialty finance firm sold about $5.1 billion in residential mortgage loans, which would result in a loss of $40 million.

VMware rose $6.71, to $57.71. The virtualization software maker rose after its strong trading debut Tuesday and after a favorable rating.

Schneider reported from Washington. Correspondent Molly Moore in Paris contributed to this report.