Rally pulls back ahead of a House vote on debt

NEW YORK - A late sell-off wiped out the stock market's gains Thursday as investors worried that a bill headed for a vote in the House of Representatives would fail to break a stalemate over raising the country's debt limit.

The market was up for much of the day but started to sink in the last half-hour of trading. Senate Majority Leader Harry Reid (D., Nev.) said in the afternoon that the House bill wouldn't get a single Democratic vote in the Senate, meaning it would fail.

"That gave a catalyst for selling," said Quincy Krosby, market strategist at Prudential Financial.

The Dow Jones industrial average fell 62.44 points, or 0.5 percent, to close at 12,240.11. The index had been up as many 82 points earlier in the day after an unexpected decrease in new claims for unemployment benefits.

Just five days remain, the Treasury Department says, until the government won't have enough money to cover all its bills. The Dow has fallen every day since Friday because of worries that the United States might default on its debt if Congress doesn't raise the borrowing limit. The Dow is headed for its worst week since early last July.

The Standard & Poor's 500 fell 4.22, or 0.3 percent, to close at 1,300.67. The S&P 500 has fallen for the last four days. The Nasdaq composite index edged up 1.46, or 0.1 percent, to 2,766.25.

Even if the United States doesn't default, investors worry that the country might lose its AAA credit rating. That could raise interest rates and possibly slow down the economy, which is still recovering from the worst recession in decades.

"We're running out of time," said Phil Dow, director of equity strategy at RBC Wealth Management in Minneapolis. "It's getting scary."

For the week, the Dow is down 3.5 percent, the S&P 500 is down 3.3 percent, and Nasdaq is down 3.2 percent.

Markets were still less volatile than Wednesday, when the Dow had its biggest one-day drop since early June. One reason for optimism: First-time applications for unemployment benefits fell to 398,000 last week, the government said, the lowest level in four months. That's a sign that employers are laying off fewer workers.

The price of gold, which tends to rise when investors are fearful of economic disruptions, fell $1.70 to $1,613.40 an ounce. It's still up 13.4 percent this year. The dollar rose against other currencies, as did Treasury prices. The dollar and Treasurys would likely fall if investors were worried that a default was imminent.

Bristol-Myers Squibb Co. rose 1.5 percent after the drugmaker reported earnings that were better than analysts anticipated. The company also raised its earnings forecast for 2011.

Exxon Mobil Corp. fell 2.2 percent after its earnings came in below analysts' estimates.

Nearly two stocks fell for every one that rose on the New York Stock Exchange. Volume was relatively heavy at 4.4 billion shares.