Blue chips fell Friday, the first trading day of 2004, as fears of overpricing and new security alerts put investors on guard, dampening enthusiasm for an upbeat report showing manufacturing activity at a 20-year high.

The Dow Jones industrial average (search) fell 44.07 points, or 0.42 percent, to 10,409.85, while the Standard & Poor's 500 Index (search) fell 3.44 points, or 0.31 percent, to 1,108.48. The technology-laced Nasdaq Composite Index (search) inched up 3.31 points, or 0.17 percent, to 2,006.68.

Light volume exaggerated Friday's price moves. For the week, the Dow climbed 0.83 percent and the S&P 500 jumped 1.15 percent. Both notched their sixth straight week of gains. The Nasdaq rose 1.70 percent for the week, its fourth consecutive up week.

The market kicked off the first trading day of 2004 on a positive note after the Institute for Supply Management (search) (ISM) reported that its monthly manufacturing index for December jumped to a 20-year high of 66.2, up from November's 62.8 and easily beating economists' forecasts of 61.0. An index reading over 50 shows expansion in the sector.

New orders, seen as a sign of future growth, rose to their highest level since July 1950. The upbeat data helped lift stocks and the dollar and prompted a sharp drop in U.S. Treasury bond prices.

But stocks lost momentum in the afternoon as investors' security fears were raised by news that British Airways canceled a London-Washington flight because of a potential threat -- the seventh time a U.S.-bound flight was canceled in just over a week.

"There's still the terrorist threats, possibly lasting through the weekend, and anybody who has got stray long positions is getting out of them," said Tim Heekin, director of trading at Thomas Weisel Partners. "You had a really nice open off the ISM number ... but I just think it's a Friday, with light attendance."

Many trading floors were still thinly staffed after the New Year's Day holiday. About 1.1 billion shares were traded on the New York Stock Exchange (search), and 1.7 billion were traded on Nasdaq.

Thomas F. Lydon Jr., president of Global Trends Investments in Newport Beach, Calif., said the meandering market was a reflection of the low volume.

"On days like that, we sometimes see dramatic moves when buy or sell programs kick in," he said.

Still, Lydon said investors have good reason to be optimistic about the new year: It's an election year, interest rates remain at 40-year lows and corporations chastised for bad practices have reformed.

AT&T Corp. was the blue-chip Dow's biggest percentage gainer, helped by a report that it has raised rates for some customers.

AT&T (T) on Thursday started charging some customers a $3.95 monthly fee, while BellSouth, the No. 3 U.S. local telephone company, levied a 99 cent monthly fee on most of its residential long-distance customers, USA Today reported Friday.

Shares of AT&T rose 57 cents, or 2.8 percent, to $20.87. BellSouth Corp. (BLS) shares slipped 3 cents to $28.27.

Drug distributors AmerisourceBergen Corp. (ABC) , McKesson Corp. (MCK) and Cardinal Health slumped after McKesson landed a large contract to sell drugs to veterans, raising concern that all the companies would have to cut prices to win future business.

Shares of AmerisourceBergen fell $2.15, or 3.8 percent, to $54. Those of McKesson fell $1.30, or 4 percent, to $31 and Cardinal fell $1.48, or 2.4 percent, to $59.68. Several brokerages also downgraded their ratings on the companies' stocks.

Citigroup Inc. (C) rose on news that its Citibank unit would be among the first foreign lenders to gain entry in China's consumer credit card industry. Shares of Citigroup, the world's largest financial services company, rose 46 cents, or 0.9 percent, to $49.

U.S.-traded Chinese stocks were among the day's bright spots. Investors, hungry for a piece of China's booming economy, snapped up shares of mainland companies, especially oil plays on forecasts that energy prices will remain high.

PetroChina (PTR) climbed $6.65, or 11.7 percent, to $63.70. China Petroleum (SNP) rose 12 percent to $49.90.

The Russell 2000 index of smaller companies was up 3.94, or 0.7 percent, at 560.85.

Overseas, Japan's markets were closed for the New Year's holiday. Britain's FTSE 100 closed up 0.74 percent, German's DAX index rose 1.35 percent, and France's CAC-40 gained 1.09 percent.

Reuters and the Associated Press contributed to this report.