The Dow and the S&P 500 ended slightly lower Friday on concerns that strong economic reports will hurt chances for an interest-rate cut. But those worries were tempered by a report that Bank of America Corp. (BAC) and Countrywide Financial Corp. (CFC) may be in early deal talks.

The Dow Jones industrial average fell 15.54 points, or 0.12 percent, to end at 12,487.02. The Standard & Poor's 500 Index slipped 1.72 points, or 0.12 percent, to finish at 1,422.18. But the Nasdaq Composite Index inched up 1.25 points, or 0.05 percent, to close at 2,435.49.

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Stocks had been substantially lower for most of the day, but those losses were pared when Countrywide shares shot up 12 percent to a lifetime high at $45.15 in the last hour of trading after the Financial Times reported that talks between the largest U.S. mortgage lender and Bank of America could lead to a merger or joint venture.

A strong profit outlook from Microsoft Corp. (MSFT) lifted technology stocks and enabled the Nasdaq to finish the day with a tiny gain.

Government reports showed stronger-than-expected new-home sales and durable goods orders in December, raising speculation that the Federal Reserve will not cut interest rates as soon as some investors had hoped. Adding to investors' interest-rate worries, yields on benchmark U.S. Treasury debt climbed to near 5 1/2-month highs.

"The market seemed to have difficulty getting its bearings one way or another, and it's very unlikely, given some evidence of inflation still in the system that the Fed would cut rates in the short-term," said Neil Wolfson, president of investment management at Wilmington Trust in New York. "There have been lots of mergers in the financial sector and I see the news on Countrywide ... people feel that there are justifications for mergers."

By the close, Countrywide shares had given up some of those late gains, but still finished up 4.2 percent, or $1.71, at $42.00 on the New York Stock Exchange.

Bank of America shares slipped 0.7 percent, or 36 cents, to close at $52.04 on the NYSE.

For the week, the blue-chip Dow average fell 0.6 percent, suffering its biggest weekly percentage drop in a month. The S&P 500 also ended the week down 0.6 percent, while the Nasdaq dropped 0.7 percent.

Investors were particularly cautious about interest rates ahead of the Federal Reserve's policy-setting meeting next week.

The benchmark 10-year U.S. Treasury note was unchanged in price at 98-1/32, with the yield at 4.88 percent -- steady with Thursday, when it hit a level previously seen last August.

Dragging on both the Nasdaq and the S&P 500 was Amgen Inc. , which posted a marginal increase in quarterly profit, but also reported disappointing clinical trial results for cancer drugs after Thursday's close. Its stock was down 4.5 percent, or $3.35, to close at $71.50 on Nasdaq.

Helping the Nasdaq, an upbeat earnings forecast from Microsoft Corp. pushed the software maker's stock up 0.5 percent, or 15 cents, to $30.60. The company reported quarterly profit fell after Thursday's close, but its results beat Wall Street's expectations and the company raised its full-year profit target.

Shares of Google Inc. , the Web search leader, contributed the most to the Nasdaq 100's gain. Google rose 1.6 percent, or $7.75, to close at $495.84.

Transportation stocks sank as a 2 percent rise in crude oil prices prompted worries that high energy costs would eat into airlines' and shippers' profits.

But a gain in energy stocks, including ConocoPhillips (COP), helped offset some of the decline.

U.S. crude oil for March delivery rose $1.19 to settle at $55.42 a barrel, as a cold snap in the Northeast boosted demand for heating oil. ConocoPhillips shares ranked among the biggest positive influences on the S&P 500, rising 1.1 percent, or 71 cents, to $64.77.

The Dow Jones Transportation Average fell 0.9 percent, led by declines in shares of Continental Airlines (CAL), which fell 3.7 percent, or $1.56, to $40.79.

Trading was moderate on the New York Stock Exchange, where about 1.51 billion shares changed hands, below the 1.84 billion daily average for last year. On the Nasdaq, about 2.08 billion shares were traded, above the 2.02 billion daily average last year.

Advancing shares outnumbered declining shares by a ratio of about 9 to 7 on the NYSE and about 8 to 6 on the Nasdaq.

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