NEW YORK - Wall Street began the third quarter by fluctuating Tuesday as investors looked for bargains and also digested a report that showed U.S. manufacturers remain under duress.

Investors moved back into the financial sector and other stocks hit hard in recent weeks.

The biggest issue for stocks has been crude oil, which held above $142 a barrel on the New York Mercantile Exchange after briefly soaring to a record high of $143.67 on Monday amid tensions in the Middle East and a weakening dollar.

The toll higher commodities prices are taking on the economy was evident in a report on manufacturing that showed companies are paying higher prices for fuel and raw materials. Stocks initially got a lift after the Institute for Supply Management said manufacturing unexpectedly grew in June, but a closer look at the report showed that the prices companies paid for fuel and materials last month continued to grow, while demand for their products is shrinking.

The overall gain came on higher exports. Taken as a whole, the ISM report turned out to be a disappointment.

"It feels like we continue to stretch and stretch until something snaps, and that will continue to happen until we do something about oil," said Jack Ablin, chief investment officer at Harris Private Bank. "This is a test of wills between oil and stocks, and hopefully we're not on some kind of collision course."

Investors were also disappointed by another drop in construction spending due to the continuing slump in housing. The Commerce Department said construction spending fell 0.4 percent, slightly less than economists' forecasts.

The Dow Jones industrial average fell 14.57, or 0.13 percent, to 11,335.44; it was down more than 100 points earlier in the session. The major indexes ended the first half of 2008 with double digit declines.

The Standard & Poor's 500 index gave up 1.65, or 0.13 percent, to 1,278.35; and the Nasdaq composite index dropped 2.87, or 0.13 percent, to 2,280.11.

The drop in the U.S. followed a steep decline in European markets. In afternoon trading, Britain's FTSE 100 fell 2.52 percent, Germany's DAX index fell 1.74 percent, and France's CAC-40 fell 2.09 percent.

Bonds were mostly unchanged after having shot higher in early trading in response to the early drop in stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.96 percent from 3.98 percent late Monday.

In corporate news, General Motors Corp. and Ford Motor Co. fell sharply ahead of June auto sales reports that are expected to show a seventh straight monthly drop. Ford fell 18 cents, or 4 percent, to $4.63; GM dropped 38 cents, or 3.3 percent, to $11.12.

CIT Group Inc. rose $1.64, or 24.1 percent, to $8.45 after the financial company announced the sale of its home lending business to Lone Star Funds for $1.5 billion. Lone Star will also assume $4.4 billion of debt and other liabilities.

CIT also agreed to sell other assets to raise a total $1.8 billion in fresh capital. Global financial companies have been raising money to combat more than $300 billion of losses from mortgage-backed securities and other risky investments.

Also in the financial sector, Lehman Brothers Holdings Inc. shares rose $1.18, or 5.9 percent, to $20.98 after a steep decline on Monday. The nation's fourth-largest investment bank had been the target of rumors that it might sell itself to Britain's Barclays PLC at a discount price.

Declining issues led advancers by a 3 to 2 margin on the New York Stock Exchange, where volume came to a light 375.2 million shares.

The Russell 2000 index of smaller companies fell 1.94, or 0.28 percent, to 687.72.