Stocks turned in a mixed performance Monday after a report showed that the nation's manufacturing sector is expanding but facing even higher costs, triggering worries about inflation and rising interest rates.

The market made a brief advance in early trading, lifted by lower oil prices and a combined $10 billion of acquisitions at NRG Energy Inc. (NRG) and R.H. Donnelley Corp. (RHD), but retraced its steps as investors mulled the latest industrial data from the Institute of Supply Management (search).

While the ISM's index was better than expected and signaled that manufacturing has so far withstood the effects of hurricanes Katrina and Rita, companies reported another steep rise in raw materials prices last month amid record energy costs. Price inflation is among the top reasons for the Federal Reserve to keep to its policy of raising interest rates.

The hurricanes are "not only creating shortages near term, but also will ultimately create a kind of vortex of demand that will be concentrated in the fourth and first quarters," said Jack Ablin, chief investment officer at Harris Private Bank. "There's been concern that that will create inflation pressure for building materials.

"Any observer who thought there was light at the end of the Fed-tightening tunnel will be deeply disappointed," he added, suggesting the Fed will hike interest rates again when it meets in November.

According to preliminary calculations, the Dow Jones industrial average (search) dropped 33.22, or 0.31 percent, to 10,535.48. Broader stock indicators ended mixed. The Standard & Poor's 500 index (search) was down 2.11, or 0.17 percent, at 1,226.70, while the Nasdaq composite index (search) gained 3.74, or 0.17 percent, to 2,155.43.

Bonds extended their slide, with the yield on the 10-year Treasury note climbing to 4.39 percent from 4.33 percent on Friday. The U.S. dollar was mixed against other major currencies in European trading, while gold prices slipped.

The Dow quickly slid into negative territory even though ISM said its September manufacturing index surged to 59.4, the best reading in a year. Economists were looking for the index to come in at 52, down slightly from 53.6 in August.

John Caldwell, chief investment strategist for McDonald Financial Group, said he was surprised by the market's mixed reaction to the upbeat ISM data, which came as Wall Street readies for the corporate earnings season later this month. Aside from higher material prices, the ISM report reflected a sharp upswing in orders and output during the month the storms struck, he said.

"I'd like to think a very positive economic report would be a nice distraction for the market," he said. "Clearly it hasn't worked out that way."

The market also considered a Department of Commerce report Monday showing August construction spending climbed 0.4 percent, the biggest gain since May. Caldwell, however, said that data was largely ignored since it reflects the month before Katrina and Rita hurt the critical Southern housing market.

Meanwhile, Wall Street enjoyed some relief as crude oil followed Friday's profit-taking session with a second day of declines, although worries remain about heating oil shortages this winter while Gulf Coast refineries recover from the hurricanes. A barrel of light crude fell 77 cents to $65.47 on the New York Mercantile Exchange.

In corporate news, NRG said Sunday it agreed to buy privately held power generator Texas Genco LLC for $5.8 billion. NRG, which runs power plants across the country, is paying $4 billion in cash and $1.8 million in stock, and will assume $2.5 billion in debt. NRG surged $5.95 to $48.55.

R.H. Donnelley announced plans to swallow its larger rival Dex Media Inc. (DEX) in a deal worth $4.2 billion in cash and stock. While Dex shareholders will own a majority — 53 percent — of the combined firm, it will keep Donnelley's name and stock symbol. Donnelley fell $1.49 to $61.77, and Dex lost 97 cents to $26.82.

Insurance stocks tumbled after Ace Ltd. (ACE) and Aspen Insurance Holdings Ltd. estimated their losses from the recent hurricanes. Ace forecast an operating loss for the latest quarter, with costs totaling $550 million from Katrina and between $100 million and $150 million from Rita, while Aspen more than doubled its projected Katrina impact to a range of $325 million to $400 million. Ace dropped $1.49 to $45.58, and Aspen plunged $4.14 to $25.41.

Wal-Mart Stores Inc. (WMT), the world's biggest retailer, on Monday said its September same-store sales should grow 3.8 percent, at the upper end of a prior 2 percent to 4 percent estimate. The growth comes even after the hurricanes forced Wal-Mart to close 126 locations last month. Wal-Mart lost 6 cents to $43.76.

Advancing issues outpaced decliners by 6 to 5 on the New York Stock Exchange, where volume of more than 1.55 billion shares just topped the 1.55 billion shares traded Friday.

The Russell 2000 index of smaller companies rose 2.75, or 0.41 percent, to finish at 670.55.

Overseas, Japan's Nikkei stock average declined 0.36 percent. Britain's FTSE 100 gained 0.43 percent, Germany's DAX index added 0.75 percent, and France's CAC-40 was higher by 0.49 percent.