Stocks lost more ground in extremely volatile trading Monday, as investors recoiled at a cautious economic outlook from a Federal Reserve...

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NEW YORK — Stocks lost more ground in extremely volatile trading Monday, as investors recoiled at a cautious economic outlook from a Federal Reserve official and the possibility of more financial troubles at Fannie Mae and Freddie Mac.

The Dow Jones industrial average fell 56.58 to 11,231.96. During the day, the blue chips rallied, tumbled, rebounded then fell again.

Broader stock indicators also declined. The Standard & Poor’s 500 index fell 10.59 to 1,252.31, and the Nasdaq composite index fell 2.06 to 2,243.32.

The technology-dominated Nasdaq got a modest boost from Yahoo, which rose $2.56, or 12 percent, to $23.91 after Microsoft expressed support for investor Carl Icahn’s effort to oust Yahoo’s board next month.

Microsoft said a successful rebellion would encourage it to renew its takeover bid for Yahoo, or to negotiate another deal.

Microsoft, one of the 30 Dow stocks, added 5 cents to close at $26.03. Boeing, also a Dow stock, fell 18 cents to $64.29.

The market found only slight solace in retreating oil prices.

Light, sweet crude fell $3.92 to $141.37 a barrel on the New York Mercantile Exchange, after falling by more than $5 a barrel at times.

San Francisco Federal Reserve President Janet Yellen said in a speech that the financial markets remained fragile and that it will take time for conditions to improve. “My expectation is that market functioning will improve markedly by 2009,” she said. “But things could get worse before they get better.”

Her words added to concerns raised in a note by Lehman Brothers analysts that Fannie and Freddie may need to raise more capital as the credit crisis continues. Worries about the ailing financial sector deflated a rally early in the day that had been fueled by the pullback in oil prices.

The market managed, however, to rebound from its lows of the day, when the Dow sank to its worst level since August 2006. Some investors bought back into the market to take advantage of the low prices.

“The market is so skittish and so scared that half the people believe that this is just another leg of the down market and the other half believes that we’re forming a bottom,” said Frank Ingarra, assistant portfolio manager at Hennessy Funds.