Stocks pared early gains after the Institute for Supply Management reported that its measure of US manufacturing activity fell to its lowest level in 26 years last month as credit conditions tightened and as disruptions remained from Hurricane Ike.

The trade group reported that its index of manufacturing activity fell to 38.9 in October from 43.5 in September. It was the weakest reading since September 1982 and well below the 41.5 economists had predicted, according to Thomson/IFR.

A separate report showed construction spending has fallen by a smaller-than-expected amount in September as a rebound in nonresidential activity helped offset further weakness in home building. The Commerce Department reported that construction spending fell by 0.3 per cent in September, less than the 0.8 per cent decline many economists had been expecting.

Analysts are also anticipating weak vehicle sales figures from the auto industry for October - even more anemic than in September, when automakers said fewer than 1 million vehicles were sold for the first time in 15 years.

The arriving economic data, particularly that on manufacturing, support the growing belief that the economy is in recession, hurt by a drop in lending and slower overall spending. But with the Dow Jones industrial average having tumbled more than 14 per cent in October - its worst month in 21 years - the market priced in a significant falloff in economic activity. Wall Street must now determine whether the selloff in stocks is adequate, not enough or overdone.

In midmorning trading, the Dow Jones industrial average fell 40.22, or 0.43 per cent, to 9,284.79.

Broader stock indicators were mixed. The Standard & Poor's 500 index rose 5.29, or 0.55 per cent, to 963.46, and the Nasdaq composite index rose 5.39, or 0.31 per cent, to 1,726.34.

The Russell 2000 index of smaller companies rose 2.39, or 0.44 per cent, to 539.91.

Advancing issues outnumbered decliners by about 4 to 3 on the New York Stock Exchange, where volume came to 214.8 million shares. Trading is expected to remain light Monday, with many investors sitting on the sidelines ahead of Tuesday's presidential election. Many analysts have said that in general, neither candidate is more favored than the other on Wall Street, but investors are eager to put the uncertainty behind them.

Given how far the stock market has already tumbled, analysts believe the market is showing signs of bottoming out. Last month, for all its problems, did end with a positive tone, thanks in large part to weeks of gradual improvement in the tight credit markets, but also because mutual funds were finished with selling at the end of their fiscal year. The Dow added 11.3 per cent last week, its best weekly performance in 34 years, while the S&P 500 index climbed 10.5 per cent.

On Monday, a key bank-to-bank lending rate known as Libor fell to 2.86 per cent for three-month dollar loans - that's down from 3.03 per cent Friday, and the lowest level since Sept 17. A fall in the London Interbank Offered Rate indicates that banks are more willing to lend to one another.

Investors' demand for short-term government debt remained high, however, a sign that they remain cautious. The yield on the three-month Treasury bill, seen as one of the safest assets around, rose only slightly to 0.46 per cent from 0.43 per cent on Friday. A low yield indicates high demand.

The yield on the benchmark 10-year Treasury note fell to 3.94 per cent from 3.96 per cent late on Friday.

On Monday, the dollar was lower against most other major currencies, while gold prices rose.

Light, sweet crude fell US$2 (S$2.95) to US$65.81 a barrel on the New York Mercantile Exchange. -- AP