NEW YORK - WALL Street stocks lost ground in volatile trade on Friday as investors turned cautious in the last day of a tumultuous week marked by swings of panic and optimism over the global financial crisis.

The Dow Jones Industrial Average shed 127.04 points (1.41 per cent) to close at 8,852.22, capping a week of ups and downs that saw the blue-chip index gain 4.7 per cent after a horrific 18 per cent meltdown the prior week.

The Nasdaq composite lost 6.42 points (0.37 per cent) to 1,711.29 and the broad Standard & Poor's 500 index dropped 5.88 points (0.62 per cent) to 940.55.

After a strong rally on Thursday, the market saw more wild swings, with the Dow index rising up to 300 points and trading as much as 260 points lower during the session.

Analysts said investors were still cautious about the impact of a global credit crunch even after governments around the world agreed to pour vast amounts of cash into banks to help ease the crisis.

'Unfortunately, the data suggests that credit markets still remain very frozen,' said Mr Fred Dickson, market strategist at DA Davidson & Co.

'We continue to get more insight from corporate America regarding the impact of the credit crisis on current business conditions. CEOs commenting on post-earnings-release conference calls are unabashedly cautious citing the impact of the credit crisis on customer financing as a big problem that could linger well into 2009.'

Market action came as a report showed construction starts on new US homes slumped an additional 6.3 per cent in September to the lowest level since the recession in 1991.

Analysts said the report was the latest in a series of recession-like indicators for the economy.

Ms Jennifer Lee at BMO Capital Markets said the decline was part of a painful but necessary correction in the housing market.

'This is bad news for (economic) growth but this is one of the necessary doses of medicine we have to gulp to move forward,' Ms Lee said.

'After all, there is still that pesky problem of still high housing inventories and the faster that pile shrinks, the better. So the September decline in starts is very encouraging.'

Mr Kevin Giddis, analyst at Morgan Keegan, said some of the efforts by governments including the US$700 billion (S$1 trillion) rescue plan for the credit crisis appear to be paying off, and that a recovery could be coming.

'There are a number of good happenings in the market,' Mr Giddis said. He noted that Libor rates for interbank loans, one of the key markets frozen in the credit crisis, are falling, and that commercial paper for corporate funding appears to be coming back.

This means investors are gaining a bit of confidence and moving out of extremely safe assets like US Treasury bills, a positive sign for the market.

'More importantly, as the funds see trades and cash head their way, they in turn will begin to come off their money and invest in short-term instruments with confidence,' he said.

'At that point, the circle of credit life will be complete and traders will return their focus back to the fundamentals.'

Among key stocks, Google jumped 5.53 per cent to US$372.54 after the Internet giant beat expectations with a quarterly profit of US$1.35 billion.

'Although shares of Google are likely to see some near-term volatility as the global economy slows, its long-term growth story remains intact,' said Mr Ryan McShane at Briefing.com.

IBM fell 0.82 per cent to US$90.78 after the computer giant reported a 22 per cent profit increase in line with its pre-announcement a week earlier.

Honeywell slid 5.04 per cent to 29.37 after the manufacturer reported better-than-expected earnings in the past quarter, but offered an outlook below the consensus estimate.

Pfizer fell 0.35 per cent to US$16.91 after setting aside US$894 million to settle litigation for its Celebrex and Bextra pain medications.

Bonds ended weaker. The yield on the 10-year US Treasury bond edged up to 3.938 per cent from 3.936 per cent on Thursday and that on the 30-year bond rose to 4.312 per cent from 4.227 per cent. Bond yields and prices move in opposite directions. -- AFP