Yahoo, Lehman Scuttle Stock Rally

An early rally Thursday came unglued when talks between Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO) fell apart and Lehman Brothers (NYSE: LEH) demoted its COO and CFO over continuing credit market troubles.

After rallying 1.5% in the morning on stronger than expected retail sales, the major averages gave it all back in the afternoon before recovering to close with gains of less than 0.5%.

Yahoo fell 10% on news that Microsoft is no longer interested in buying the whole company, while Microsoft rallied 4% on relief that it won’t overpay for its internet rival. Google (NASDAQ: GOOG), meanwhile, edged higher on speculation that it will likely partner with Yahoo in a search advertising deal.

Friday could turn out to be another eventful day, as traders digest consumer inflation data before the market opens amid Federal Reserve threats to raise interest rates.

Qualcomm (NASDAQ: QCOM) was up 5.8% after raising its guidance on strength in 3G wireless sales.

Nortel (NYSE: NT) had another strong day, up 9% on a JP Morgan upgrade.

Palm (NASDAQ: PALM) jumped 10% on a deal with Verizon (NYSE: VZ), while Apple (NASDAQ: AAPL) and Research in Motion (NASDAQ: RIMM) ended the day lower.

The Nasdaq rose 10 to 2404, the S&P added 4 to 1339, and the Dow rose 57 to 12,141. Volume rose to 4.75 billion shares on the NYSE, and 2.12 billion on the Nasdaq. Advancers led by a 16-15 margin on the NYSE, and 15-13 on the Nasdaq. Upside volume was 58% on the NYSE, and 59% on the Nasdaq. New highs-new lows were 29-187 on the NYSE, and 43-183 on the Nasdaq.