Stocks turned in a mixed performance yesterday after a report showed that the nation's manufacturing sector is expanding but facing even...

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NEW YORK — Stocks turned in a mixed performance yesterday 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 Dow Jones industrial average dropped 33.22 to 10,535.48.

Microsoft, one of the 30 Dow stocks, fell 23 cents to close at $25.50 a share. Boeing, also a Dow stock, declined 81 cents to $67.14.

Broader stock indicators ended mixed. The Standard & Poor’s 500 index was down 2.11 at 1,226.70, while the Nasdaq composite index gained 3.74 to 2,155.43.

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The market made a brief advance in early trading, lifted by lower oil and a pair of multibillion-dollar acquisitions, but retraced its steps as investors mulled the latest industrial data from the Institute of Supply Management (ISM). Meanwhile, news that global computer-chip sales grew 1.7 percent in August bolstered gains in technology stocks.

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 increase interest rates again when it meets in November.

The Dow quickly slid into negative territory although 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 corporate-earnings reports 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 yesterday showing August construction spending climbed 0.4 percent, the biggest gain since May. Caldwell, however, said that data was likely ignored since it reflects the month before Katrina and Rita hurt the critical Southern housing market.

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.