Stocks lost more ground in extremely volatile trading today, 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 today, 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. Over the course of the day, the blue chips rallied, tumbled, rebounded and then fell once more. The Dow dropped as low as 11,120.74 — its lowest trading level since Aug. 15, 2006.

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 negotiate another deal.

Microsoft, one of the 30 Dow stocks, added 5 cents to close at $26.03 a share. 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 close at $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.”

The comments 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 stock rally early in the day that had been fueled by a $4-a-barrel 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 mid-August of 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.

Volatility, as measured by the Chicago Board Options Exchange’s volatility index, today briefly hit its highest point since March, when worries about the financial markets peaked during the buyout of Bear Stearns.

“It indicates that there was more fear entering the market than there had been in previous weeks,” said Todd Salamone, director of trading and vice president of research at Schaeffer’s Investment Research.

Fannie Mae fell $3.04, or 16.2 percent, to $15.74 and Freddie Mac fell $2.59, or 17.9 percent, to $11.91, after Lehman Brothers analysts said new accounting rules could require Fannie to raise $46 billion more capital and Freddie to raise $29 billion.

Citigroup, JPMorgan Chase, and Bank of America also saw their shares fall ahead of their earnings reports later this month. Citi fell 42 cents, or 2.5 percent, to $16.40; JPMorgan dropped $1.27, or 3.6 percent, to $34.04; and Bank of America fell 87 cents, or 3.9 percent to $21.53.

In addition to financials, Merck dragged on the Dow, falling $1.85, or 4.8 percent, to $36.60. A UBS analyst downgraded the drugmaker, citing slowing sales of its HPV treatment Gardasil.

Meanwhile, General Motors is considering cutting more white-collar jobs and getting rid of some brands, according to a person familiar with the company’s discussions. The person asked not to be identified because no decisions have been made. GM shares, which recently sank to all-time lows, rose 12 cents to $10.24.

Investors haven’t been as optimistic lately about the prospects for an economic recovery in the second half of 2008 as they once were. The Dow has fallen the last three weeks while the Standard & Poor’s 500 index and the Nasdaq composite index have logged five straight weeks of declines. With drops of more than 20 percent from their October highs, the Dow and the S&P 500 entered bear market territory last week as rising oil stirred inflation concerns.

Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York, said some negative technical indicators on Thursday presaged the market’s weakness today. Notably, there were no companies that set 52-week highs on the New York Stock Exchange on Thursday, Fullman said. “It’s unusual to see a drop-off like that.”