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The markets pared heavy losses after traders breathed a sigh of relief that stress tests on Spain's embattled banking system were not as bad as some had feared.
As of 3:30 p.m. ET, the Dow Jones Industrial Average fell 65.5 points, or 0.49%, to 13420, the S&P 500 dipped 7.6 points, or 0.52%, to 1440 and the Nasdaq Composite slumped 16.8 points, or 0.53%, to 3120.
Focus across trading desks has been shifting back to the eurozone in recent days. Spain revealed a wide-ranging budget plan Thursday designed to cut down its deficit in coming years and then on Friday unveiled stress tests on its banking sector.
The test showed that Spain’s banking system would have a 59 billion euro ($76 billion) capital shortfall in a stressed scenario. Additionally, seven banks have capital needs, while another seven do not. Among the banks requiring capital are Bankia and Banco Popular.
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"The results confirm that the Spanish banking sector is mostly solvent and viable, even in an extremely adverse and highly unlikely macroeconomic settings," the Bank of Spain said in a report.
However, offsetting the relatively positive news from Spain was a worrisome report on U.S. manufacturing.
The Institute for Supply Management-Chicago's PMI gauge sunk to 49.7 in September from 53 in August, suggesting the Midwest manufacturing sector shrunk for the first time since September 2009. Economists expected the closely-watched indicator to hold steady for the month.
"Given manufacturing’s importance to the recovery thus far, the slowdown is most unwelcome," Dan Greenhaus, chief global strategist at BTIG wrote in a note to clients.
A separate report showed consumer sentiment waned in late September from earlier in the month. The Reuters/University of Michigan survey checked in at 78.3 from an earlier reading of 79, missing expectations of a slighter dip to 79.
The Commerce Department said consumer spending rose 0.5% in August from July as expected, the largest rise since February. Personal income rose 0.1%, slightly under the 0.2% expected.
On the corporate front, Bank of America (BAC) said it will pay $2.43 billion to settle a class action lawsuit initiated in 2009 over its purchase of Merill Lynch. Research in Motion (RIMM) shares soared after the BlackBerry-maker posted quarterly resulted that topped expectations on the top and bottom lines.
Apple (AAPL) Chief Executive Officer Tim Cook issued an apology letter to customers over the highly-criticized Maps app for its new mobile operating system, iOS 6. The world's biggest company by market capitalization received poor reviews for the app after switching from one powered by Google (GOOG) to a home-brewed solution.
The major market averages have posted solid gains in the third quarter. In fact, the S&P 500 and Nasdaq are both poised to close out the three-month period more than 6% to the upside. Action from the Federal Reserve, European Central Bank, People's Bank of China and other major central banks aimed at buoying the world economy has helped to boost sentiment.
Oil futures were slightly higher. The benchmark contract traded in New York gained 34 cents, or 0.37%, to $92.19 a barrel. Wholesale New York Harbor gasoline surged 6.3% to $3.342 a gallon.
In metals, gold ticked down $6.50, or 0.37%, to $1,771 a troy ounce.
The Euro Stoxx 50 sold off by 2.1% to 2454, the English FTSE 100 dipped 0.65% to 5742 and the German DAX dropped 1% to 7216.
In Asia, the Japanese Nikkei 225 slumped 0.89% to 8870 and the Chinese Hang Seng drifted higher by 0.38% to 20840.