(Reuters) Technology shares slumped on Wednesday and pushed the Nasdaq down 1 percent after Oracle reported results that cast doubts on the sector's health, even as broader markets closed mostly flat in a thinly traded day.

Outside the Nasdaq, the market recovered from early losses as some recent fears over Europe faded. Traders tried to build momentum for a year-end rally and possibly erase the S&P 500's 1.1 percent losses so far in 2011.

After Tuesday's close, Oracle Corp reported earnings and sales that missed expectations for the first time in a decade. The software giant joins a growing list of companies, including some of technology's biggest and oldest names, whose results and outlooks have raised alarm bells about business conditions.

The stock plunged 12 percent to $25.77 on heavy volume and was the top decliner in the Nasdaq 100 <.NDX>. Shares of other tech companies also fell. IBM was the biggest drag on the Dow, down 3.1 percent at $181.47. Cisco Systems Inc lost 2.6 percent to $17.92 at the close. The Philadelphia semiconductor index <.SOX> fell 1.2 percent.

Oracle is a tech story, but there's concern it could be a broader economic story, said Brad Sorensen, director of market and sector analysis at Charles Schwab in Denver. We're not ready to go that far yet, but it does show that businesses are unsure about the economic situation, especially with all the uncertainty about Europe.

Despite that, Sorensen said the light volume ahead of the Christmas and New Year's holidays would exacerbate market volatility, making the moves a little more dramatic than normal.

The Dow Jones industrial average <.DJI> rose 4.16 points, or 0.03 percent, to 12,107.74. The Standard & Poor's 500 Index <.SPX> gained 2.42 points, or 0.19 percent, to 1,243.72. The Nasdaq Composite Index <.IXIC> slid 25.76 points, or 0.99 percent, to 2,577.97.

For the year, the Dow is up 4.6 percent while the Nasdaq is down 2.8 percent.

In Europe, investors worried that cut-rate loans from the European Central Bank's recent funding operation would not be used to buy Italian and Spanish debt, which would help lower elevated yields and reduce the pressure on refinancing for the debt-stricken countries.

European banks took nearly 490 billion euros in three-year cut-price loans from the European Central Bank on Wednesday. While a widening of the yield spread between German and Italian debt initially suggested that money was not flowing where it is most needed, those concerns faded toward the end of the day.

As investors digest what the ECB is doing, there's some recognition of the fact that European banks are better off having more money on their balance sheets even if it isn't being lent out, said Mike Shea, a managing partner and trader at Direct Access Partners LLC in New York.

An Italian banking group said banks would not increase their exposure to sovereign debt even after the ECB offering because European Bank Authority rules discourage it.

Ryan Larson, head of equity trading at RBC Global Asset Management in Chicago, said unconfirmed talk was circulating in the market that banks would use ECB loans to buy German bonds and not to support the debt of Spain and Italy.

That kind of spooked the market, he said. While it is a positive development in terms of the lending facility, there are still a lot of problems out there.

He said he was not able to confirm any of the market speculation.

Tuesday's rally had lifted the S&P 500 above its 50-day moving average. Many investors and traders are looking for a seasonal Santa rally through the end of the year and are keen to jump on any signs of momentum.

U.S.-listed shares of Research in Motion Ltd jumped 10.1 percent to $13.78 and ranked as the Nasdaq 100's top gainer after Reuters reported that Amazon and other potential bidders had been looking at making an offer for the BlackBerry maker, although interest had cooled somewhat.

The latest economic data showed sales of previously owned U.S. homes surged in November, but revisions to data for the last four years gave proof that the housing market's recession was deeper than previously thought.

Contract electronics manufacturer Jabil Circuit Inc posted first-quarter revenue below estimates and said it sees lower revenue in the second quarter. Shares fell 2.8 percent to $19.40.

Volume was light, with about 6.52 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 8.47 billion.

About 59 percent of companies traded on the New York Stock Exchange closed in positive territory while about 48 percent of the Nasdaq ended lower.

(Reporting by Ryan Vlastelica; Editing by Jan Paschal)

S&P Dow jones Oracle New York