Stocks falter after S&P's Europe downgrade threat

Stocks wavered between small gains and losses in midday trading Tuesday after Standard & Poor's (S&P) expanded its downgrade threat against Europe to include the region's bailout fund.

The credit-rating agency warned late Monday that it might downgrade 15 countries that use the euro, even Germany, which has a perfect AAA rating and Europe's strongest economy. On Tuesday, S&P said it might also cut the AAA rating of Europe's bailout fund. The fund needs that top rating to cheaply raise money, and losing it would mean it would cost billions more to fund bailouts. European markets mostly fell on the news.

The S&P's 500 index was down less than a point at 1,256 just before noon Eastern time. The Nasdaq composite index fell 10, or 0.4 per cent, to 2,645.

The Dow Jones industrial average rose 40 points, or 0.3 per cent, to 12,138. Among the Dow's top performers was 3M Co, which rose 1.7 per cent after the maker of Post-It notes forecast 2012 earnings that were stronger that many analysts were expecting.

Traders are looking ahead to a crucial summit of European leaders that wraps up Friday. They hope to see more concrete solutions to restore long-term confidence in the euro and rescue the region from the sovereign debt crisis that has roiled world markets for months.

"We are coming to a head in Europe, and it's no longer about the small countries like Greece," said Paul Zemsky, chief investment officer at ING Investment Management. He said current stock prices reflect traders' expectations of a rate cut from the European Central Bank tomorrow and strong political action on Friday. Any less than that, he said, and "it's anyone's guess how bad things will get, but they'll get pretty bad".

The S&P warning left out only two of 17 countries that use the euro: Cyprus, which already is being reviewed for a downgrade from near-junk status, and Greece, whose low ratings already suggest it is likely to default soon anyway. Scepticism over a new plan to prevent a break-up of the common currency also dragged markets lower.

S&P's announcement halted a rally in European markets. It came just hours after the leaders of Germany and France unveiled a series of proposals, including punishing governments for overspending, that they hope will persuade the European Central Bank or the International Monetary Fund to lend the Eurozone more support. Germany's DAX index fell one per cent, while France's CAC-40 fell 0.4 per cent.

The warning also clipped an advance on Wall Street late Monday. The Dow Jones industrial average finished with a gain of 78 points. It had been up 167 points before reports of the S&P action emerged.