(Updates with early U.S. markets, previous LONDON)
By Richard Chang
NEW YORK, Sept 27 (Reuters) - Blue-chip stocks fell on Friday as bearish corporate outlooks sent investors scurrying back to safe-haven bonds and gold, while oil prices dropped after a storm subsided in the Gulf of Mexico.
Dow components General Electric Co. and Philip Morris Cos. Inc. led a U.S. blue-chip selloff after investment banks cut their investment ratings on GE and the world's largest cigarette maker slashed its full-year outlook.
"The market wants to believe in the upside, but it doesn't have enough tangible proof that the earnings picture has turned," said Paul Cherney, chief real-time market analyst at S&P Marketscope.
However, tech stocks turned higher on window-dressing, he said. Monday is the last day of the third quarter, which could bring swings in the market as money managers dress up their portfolios by dropping the quarter's losers and adding winners.
The blue-chip Dow Jones industrial average fell 89 points, or 1.12 percent, to 7,907, after a two-day run-up. The broad Standard & Poor's 500 Index lost 4 points, or 0.55 percent, to 850.
The technology-laced Nasdaq Composite Index rose 7 points, or 0.59 percent, to 1,228, after falling at the open.
In Europe, the FTSE Eurotop 300 index was down 0.5 percent at 854 points. Tokyo's Nikkei average rose 2.25 percent, or 209.52 points, to 9,530.44 on signs that the Japanese government is warming to the idea of using public funds for banks.
"We've had a couple of good days and it's nice to see we're stabilizing, but as Philip Morris shows there are still some big problems out there," said David Thwaites, European strategist at BNP Paribas in London.
Lehman Brothers and Credit Suisse First Boston downgraded GE's stock a day after a conference call with the conglomerate. They said a recovery in such "short-cycle" businesses as GE's plastics unit seems to have stalled and its finance unit is under pressure. GE fell $1.39, or 5.27 percent, to $24.99.
Philip Morris said that despite heavy promotions of its premium-priced brands, consumers have turned to deep-discount rivals. Philip Morris sank $4.70, 11 percent, to $38.03.
The market shrugged off as old news a report showing that U.S. consumer sentiment dropped for a fourth month in September but was stronger than expected. The University of Michigan's final September consumer sentiment index fell to 86.1 from 87.6 in August, market sources said.
Yields on U.S. Treasuries fell toward historic lows again as investors returned to the safety of government debt on signs the equity rally of the past two days is stalling and on persistent fears of a Gulf war.
The 10-year note rose 9/32 to 105-6/32, pushing its yield down to 3.74 percent from 3.77 percent.
Despite two days of profit-taking the yield is still down on last Friday's 3.78 percent and if it ends the day here, it will be the lowest weekly close since the summer of 1958.
The five-year note firmed 6/32 to 102-5/32, taking yields to 2.78 percent from 2.82 percent, while the 30-year bond gained 10/32 to to 110-11/32 yielding 4.71 percent from 4.73 percent.
At the short end, the two-year note rose a sizable 5/32 to 99-30/32 dragging yields to 1.91 percent from 1.99 percent. That saw the gap between two- and 30-year yields widen out to 281 basis points from 274 earlier in the week.
The dollar held steady, caught between Wall Street's rally and continuing Middle East tension.
On the Commodity Exchange, December gold rose 50 cents to $322.20 an ounce, steadying from its early low at $320.20 and touching $323.10.
The contract fell Wednesday and Thursday, correcting an advance to a 13-week high at $329.30 on Tuesday, when gold neared 2-1/2 year peaks just over $330 from early June.
Oil prices slipped as a tropical storm in the Gulf of Mexico, which had disrupted crude supplies, subsided, although simmering tension over Iraq continued to support the market.
Benchmark Brent crude oil slipped 22 cents to $28.67 a barrel, while U.S. crude futures fell 22 cents to $30.19.