By Steven C Johnson

NEW YORK - The Dow and S&P 500 rose on Monday as investors bet Washington's bailout of U.S. home finance companies Fannie Mae and Freddie Mac will stabilize the housing market and ease the credit crisis.

U.S. stocks, however, were well off highs that had driven the Dow up as much as 350 points earlier, as doubts about the ability of the takeover to set the stage for an economic recovery cut into gains and weakness among technology shares pushed the Nasdaq into the red.

Financial shares, including Bank of America and Citigroup, led gainers on the Dow and S&P on hopes that the government's move would help stabilize a slumping U.S. housing sector.

Any recovery in home prices will be largely dependent on the health of Fannie and Freddie, which are the biggest providers of housing finance in the country.

"We've had a major uncertainty removed form the market - both in the U.S. and globally," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis. "It was critical for the government to step in. Does it solve all our problems? No. But it's a strong step in the right direction."

The Dow Jones industrial average was up 174.48 points, or 1.56 percent, at 11,394.79. The Standard & Poor's 500 Index was up 12.71 points, or 1.02 percent, at 1,255.02. The Nasdaq Composite Index was down 8.48 points, or 0.38 percent, at 2,247.40.

Still, the initial euphoria that carried the Dow up more than 3 percent in early trade had fizzled by midday, as investors continued to worry about U.S. and global growth.

The Nasdaq, which had rallied more than 2 percent in early trade, had slipped into negative territory by midday, weighed down by semiconductor shares. An index on the group was down 1.6 percent.

Several brokerages on Monday downgraded National Semiconductor after the analog chip maker posted a lower quarterly profit on Friday.

In the financial sector, Bank of America shares added 5.4 percent to US$33.96 while Citigroup rose 4.5 percent to US$19.93. The S&P financial index rose more than 2.4 percent.

Investors hope the bailout of Fannie and Freddie, which carries an explicit government backing for debt issued by the two, will shore up confidence in the mortgage market and stem a wave of bank write-downs.

But a 12.5 percent decline in Lehman Brothers shares dented earlier gains for the sector after news that the investment bank was meeting with potential buyers for its Neuberger Berman asset management firm.

"If they raise the cash, that tells you two things: They are desperate for the cash. Secondly, if they sell at a bargain basement price that's not good," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Home builders also advanced, with the Dow Jones home construction index rising more than 8 percent.

Shares of luxury home builder Toll Brothers jumped 7.4 percent to US$25.99 on the New York Stock Exchange.

The bailout of Fannie and Freddie could, however, wipe out the companies' common and preferred shareholders. Fannie and Freddie common stocks were each trading at about US$1 a share, off more than 80 percent from Friday's close on New York Stock Exchange.

Also on the Nasdaq, shares of UAL Corp., the parent of United Airlines, pared massive losses to trade down 12 percent at US$10.82. The shares had initially plunged after a Chicago Tribune story about UAL possibly filing for bankruptcy. UAL said the story was "untrue."

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