The market was cheered after the Japanese central bank signaled an end to its current interest rate policy, set in place five years ago to fight inflation and also lift a sagging economy. The new policy, focused less on rising prices and more on Japan's growing economic strength, encouraged U.S. investors worried about the Federal Reserve's stance on interest rates and inflation.

"Now you have the Bank of Japan, the European Central Bank and the Federal Reserve all with the same interest rate policy, and that's very positive," said Peter Cardillo, chief strategist, and senior vice president at S.W. Bach & Co. "It's a strong indication that global central bankers will contain inflation and not necessarily choke off economic activity, which has been a big concern here."

However, the session's gains slipped away by early afternoon as investors focused on increasing unemployment claims, which climbed above the 300,000 mark for the first time in eight weeks, and awaited the Labor Department's monthly job creation report, due tomorrow. A new record for the nation's trade gap also darkened investors' mood, which has soured in recent days amid continued uncertainty over the economy and the Fed's interest rate policy.

According to preliminary calculations, the Dow Jones industrial average fell 33.46, or 0.3 percent, to 10,972.28.

Broader stock indicators also fell. The Standard & Poor's 500 index lost 6.24, or 0.49 percent, to 1,272.23, and the Nasdaq composite index dropped 17.74, or 0.78 percent, to 2,249.72.

In the bond market, prices moderated as the yields on long-term Treasuries began to outpace shorter-term notes. The yield on the 10-year Treasury note was steady at 4.73 percent from late yesterday. The dollar was mixed against other major currencies, while gold prices rose.

Crude oil futures moved higher, but remain more than $2 per barrel lower from last Friday's trading. A barrel of light crude settled at $60.47, up 45 cents, on the New York Mercantile Exchange.

Investors were somewhat uneasy as they awaited the monthly job creation report, due tomorrow. The state of the labor market could give Wall Street insight into wage inflation — a key component of the Fed's interest rate policy.

"The market is preparing for a pretty good bounce in employment," said Michael Strauss, chief economist for Commonfund. "What that means, though, is some more concern about inflation as demand increases."

The Fed doesn't meet until the end of the month, giving investors time to worry about individual economic reports and likely preventing a sharp move higher in stocks until then.

Dow industrial General Motors Corp. added 92 cents to $21.34 as The Wall Street Journal reported that GM and bankrupt auto parts maker Delphi Corp. are close to a cost-cutting labor agreement. Such an agreement would avoid a possible strike at Delphi that could cripple GM's production. The UAW strongly disputed the report, however.

Google Inc. said it will pay up to $90 million to settle a lawsuit that claimed the company overcharged advertising customers for Internet sales referrals, a "click-fraud" that involved Google's ad service users clicking on other companies' ads simply to drive up their own revenues. Google fell $10.88 to $343.

The NYSE Group Inc. dropped $3.90, or 4.9 percent, to $76.10 in its second day of trading on the New York Stock Exchange as investors took profits after its 25 percent gain from the previous session.

Declining issues outnumbered advancers by nearly 9 to 7 on the NYSE, where volume came to 1.56 billion shares, compared with 1.77 billion traded yesterday.

The Russell 2000 index of smaller companies fell 3.56, or 0.49 percent, to 718.28.

Overseas, Japan's Nikkei stock average surged 2.62 percent on the Japan central bank's move. In Europe, Britain's FTSE 100 was up 0.74 percent, France's CAC-40 rose 0.77 percent for the session, and Germany's DAX index gained 1.04 percent.