Mooted deal gives late lift to stocks

US stocks fell yesterday but staged a late comeback after fears of a looming Greek debt default diminished on news of a possible deal to advance new bailout funds to Greece.

Stocks spent most of the session sharply lower after European leaders disappointed investors by failing to come up with any new solutions to the Eurozone’s sovereign debt crisis over the weekend.

However, a Greek finance ministry official said after talks yesterday with the European Union and International Monetary Fund that the country was near an agreement with international lenders to continue receiving money.

“For the time being it looks as though there is hope the conversation is going to take on a more positive and constructive tone,” said Peter Kenny, managing director at Knight Capital.

Energy and financial stocks were among the worst performers of the session. The PHLX oil service sector index dropped 1.7 per cent as oil prices settled down 2.6 per cent to $85.70 on demand worries.

The KBW bank index fell 2.8 per cent following a steep decline in European banks on worries Eurozone leaders won’t be able to prevent debt-stricken Greece from sliding into default. Citigroup slipped 4.4 per cent to $27.71.

International lenders told Greece yesterday it must shrink its public sector and improve tax collection to avoid default within weeks as investors, unnerved by political setbacks in Europe dumped risky Euro zone assets.

The US Federal Reserve will begin a two-day meeting today and is poised to increase downward pressure on longer-term interest rates this week in a bid to accelerate a sputtering US recovery.

“It’s the Greece thing and the Fed meeting this week. We’ve seen a lot of write-up on this Operation Twist, a lot of it may be baked in,” said Terry Morris, senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.

The Dow Jones industrial average dropped 108.08 points, or 0.94 per cent, to 11,401.01. The Standard & Poor’s 500 Index lost 11.92 points, or 0.98 per cent, to 1,204.09. The Nasdaq Composite Index edged down 9.48 points, or 0.36 per cent, to 2,612.83.

In the “twist” operation, traders expect the Fed to try to stimulate growth by pushing down longer-term debt yields by buying bonds and selling short-term debt. A Fed statement is expected tomorrow.