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U.S. blue chips sink as interest rate fears return

(Updates to late morning)

By Bill Rigby

NEW YORK, April 23 (Reuters) - U.S. blue-chip stocks fell on Friday, led down by construction equipment firm Caterpillar Inc. , as fears of impending interest rate hikes returned to worry investors.

Technology stocks rose for the third straight session as revenue increases at Microsoft Corp. suggested the rebound in technology spending is persisting.

"It's going to be a bit of a bumpy road until the market really gets used to the idea of interest rates going up eventually," said Ozan Akcin, chief market strategist at Puglisi and Co. "The stronger top and bottom lines show how good the growth is and that means interest rates will have to rise at some point."

Just over halfway through the first-quarter earnings season, nearly 80 percent of S&P 500 companies that have reported beat Wall Street's expectations.

But some fear that bumper profits, and the economy's steady recovery, will soon lead to higher interest rates as the Federal Reserve tries to contain inflation. That, in turn, may cap companies' profit for a time.

Evidence of the economy's recovery was bolstered early Friday by Commerce Department data showing orders for long-lasting durable goods surged in March, as U.S. factories sought to keep up with unexpectedly strong demand.

The Dow Jones industrial average was down 35.35 points, or 0.34 percent, at 10,425.85. The Standard & Poor's 500 Index was down 3.97 points, or 0.35 percent, at 1,135.96. The technology-focused Nasdaq Composite Index was up 3.67 points, or 0.18 percent, at 2,036.58.

Microsoft was the most heavily traded stock on Nasdaq, up $1.61, or 6.2 percent, to $27.55. On Thursday, the world's largest software maker said quarterly profit fell after charges to settle legal disputes, but revenue rose a better-than-expected 17 percent on stronger personal computer sales.

Caterpillar was the biggest drag on the Dow, falling $1.74, or 2 percent, to $82.36. The drop comes after sharp gains on Thursday when the construction and mining equipment maker said quarterly earnings more than tripled and it raised its profit outlook.

Insurance brokers were badly hit on news that New York Attorney General Eliot Spitzer, whose investigations of the mutual fund and stock research businesses led to industrywide reforms, is now investigating fees earned by brokers.

Marsh & McLennan Cos. , the world's largest broker, fell 95 cents, or 2 percent, to $45.04. Aon Corp. , the world's No. 2, fell $1.22, or 4.2 percent, to $27.54.