Wall Street Rally Fades After Warnings on Europe

(REUTERS) A rally in stocks fizzled, leaving major indexes with modest gains on Friday, as Wall Street was torn between hope that U.S. economic data signals better times ahead and fear Europe's debt crisis will engulf world economies.

About 8.9 billion shares changed hands on the New York Stock Exchange, NYSE Amex and Nasdaq, higher than this year's average of 7.9 billion.

Trading was choppy due to quadruple-witching, the expiration of four types of futures contracts -- equity options, stock index futures, stock index options and single stock futures.

After an early rally, buying dried up when rating agency Fitch warned of risk of recession in Europe.

Major U.S. stock indexes, highly correlated to the performance of the euro, slipped in tandem with that currency after Fitch revised its outlook on France's AAA rating to negative, which means a downgrade is possible in 12 to 18 months.

Investors are tired of headlines coming out of Europe and tired of the fact that there isn't a cohesive solution. But then, it's never one way or the other so they can't just ignore them, said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedfor Hills, New York.

The Dow Jones industrial average <.DJI> was down 2.42 points, or 0.02 percent, at 11,866.39. The Standard & Poor's 500 Index <.SPX> was up 3.91 points, or 0.32 percent, at 1,219.66. The Nasdaq Composite Index <.IXIC> was up 14.32 points, or 0.56 percent, at 2,555.33.

The Nasdaq performed relatively better as stocks tied to growth, including technology, gained. Shares of Adobe Systems Inc jumped 6.6 percent to $28.20 after results from the maker of Photoshop and Acrobat software beat Wall Street projections.

For the week, the Dow fell 2.7 percent, the S&P lost 2.9 percent and the Nasdaq was down 3.5 percent.

U.S. financials <.GSPF>, which have underperformed the S&P 500 this week, were one of the strongest of the 10 top sectors in the benchmark index, up 0.5 percent. Credit card company Discover Financial added 5 percent to $24.23 a day after posting strong results and raising its dividend.

Online game maker Zynga Inc shares opened 10 percent above their initial public offering price of $10 per share but rolled back showing that investors were concerned about the Farmville maker's dependence on Facebook. Shares hit a session low of $9 and closed at $9.50.

U.S. consumer prices were flat in November as Americans paid less for cars and gasoline, while the 12-month inflation reading fell for the second straight month, which could give the Federal Reserve more room to help a still-weak economy.

Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said subdued inflation will be a long-term positive as consumers benefit from contained prices.

That's one of the reasons you're seeing better consumer (confidence) of late, he said.

Research In Motion Ltd posted a sharp drop in profit on Thursday, offered a dismal outlook for BlackBerry shipments during the holidays and delayed an overhaul of its smartphones. The U.S.-traded stock dropped 11.1 percent to $13.44.

Data this week suggested a strengthening U.S. economic recovery, giving further support to equities.

Jobless claims fell to a 3-1/2-year low last week and factory activity in parts of the Northeast picked up in December, data showed on Thursday.

(Reporting by Angela Moon; Editing by Kenneth Barry)