Pat Dollard | Young Americans

NEW YORK (AP) - A jittery Wall Street advanced Monday, fighting to reverse Friday’s sharp losses as investors took a dismal new home sales report as a sign that the Federal Reserve will lower rates this week.

The Commerce Department reported sales of new homes in December fell by 4.7 percent, and that 2007 new home sales plunged by a record 26.4 percent compared to 2006.

The dismal results magnified investors’ concerns that there may be more massive write-downs by big banks for subprime loan losses, but raised their hopes that the Fed might cut rates again by a wide margin to stoke the weakening U.S. economy.

“Anticipation of another Fed rate cut is the main magnet in the market today,” said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc.

But he said he was skeptical the gains would stick—anything the Fed decides after its two-day meeting lets out Wednesday could be met with disappointment. If the rate cut is small or nonexistent, the market will likely be unsatisfied; if the cut is wide, the market may worry the economy is worse than it thought.

The Dow Jones industrial average rose 65.44, or 0.54 percent, to 12,272.61, by late morning after falling in earlier trading.

Broader stock indicators also advanced. The Standard & Poor’s 500 index rose 10.30, or 0.77 percent, to 1,340.91, while the Nasdaq composite index rose 9.96, or 0.43 percent, to 2,336.16.

Profit reports Monday were ostensibly upbeat, but revealed some troubling signals about the economy. Fast food seller McDonald’s, a Dow component, said its quarterly profit rose 3 percent due to tax benefits and strong sales, but December U.S. sales were flat with a year ago as cash-strapped consumers pared back spending.

McDonald’s shares fell $3.25, or 6 percent, to $50.85.

Merger and acquisition news Monday added to the market’s uncertainty. Blackstone Group LP on Monday said it is still interested in buying Alliance Data Systems Corp., but that the $6.4 billion deal is in jeopardy because regulators want to place onerous terms on the takeover. ADS dropped $25.50, or 38.9 percent, to $40.10. Blackstone slipped 9 cents to $19.27.

Government bond prices rose due to unease about the economy. The 10- year Treasury note’s yield, which moves opposite its price, fell to 3.58 percent from 4.24 percent last Friday.

The dollar fell against major currencies, and gold prices rose.

Crude oil fell 69 cents to $90.02 a barrel on the New York Mercantile Exchange.

Trading this week is expected to be volatile due to such major events as President Bush’s final State of the Union address Monday evening and the Federal Reserve’s interest rate announcement, are expected to influence trading. The Fed lowered rates by 0.75 of a percentage point last Tuesday, and traders are betting on at least a quarter-point rate cut after the central bank’s two-day meeting ends Wednesday afternoon.

Hopes for a very large cut had been tempered late last week by news that French bank Societe Generale sold European index futures to close positions taken by an alleged rogue trader. It is thought those trades may have aggravated the massive losses one week ago in Europe and Asian trading, when the U.S. markets were closed.

But given that December’s new home sales data was so dismal, traders now believe the Fed could be more inclined to lower rates by a half- point.

Overseas markets fell Monday amid continuing economic concerns and also in response to Friday’s decline on Wall Street. In Tokyo, the Nikkei stock average dropped 4 percent and a key index in Shanghai plunged 7.2 percent. European exchanges also were largely under pressure, as London’s FTSE 100 fell 2.05 percent, Frankfurt’s DAX gave up 1.22 percent and Paris’s CAC 40 lost 1.54 percent.

Declining issues outnumbered advancers by about 8 to 7 on the New York Stock Exchange, where volume came to 480.5 million shares.

The Russell 2000 index of smaller companies fell 5.39, or 0.78 percent, to 693.99.