NEW YORK (AP) – A still skittish Wall Street closed modestly lower Thursday, having clawed its way back from an early-session plunge after upbeat manufacturing data allayed fears about a flagging U.S. economy.

The Dow Jones industrials ended 34 points lower after tumbling 209 points in early trading and then briefly reaching positive territory in the afternoon.

Investors, relieved that manufacturing is still expanding, bought some of the stocks pummeled in Tuesday’s drop, which sliced 416 points off the Dow.

The blue chip index is now down 398 points, or 3.2 percent, from its closing level Monday, having rebounded halfheartedly Wednesday on calming words about the economy from Fed Chairman Ben Bernanke.

The Institute for Supply Management’s index of February manufacturing activity came in at 52.3, stronger than the 50.0 reading analysts expected. The index is an important measure of a part of the economy that has given investors headaches in recent months. Manufacturing had contracted a month earlier, according to the index, suffering from the listless housing market and hard-up auto industry.

A reading at 50 and above indicates expansion, while anything below 50 signals contraction.

The ISM data helped the market regain lost ground, but anxiety still plagued the Street, with the indexes bouncing around choppily as many investors bailed out of equities and fled to safe havens like Treasurys, betting that stocks have further to fall.

“The aftermath of Tuesday’s major selloff will linger for the next couple of days. I don’t think we’re totally out of the woods yet,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.

The Dow fell 34.29, or 0.28 percent, to 12,234.34, after dropping as low as 12,056.54 in the first hour of trading. It hasn’t traded at these levels since early December.

Broader stock indicators also ended down after fluctuating in the afternoon. The Standard & Poor’s 500 index fell 3.65, or 0.26 percent, to 1,403.17, after tumbling 26 points earlier in the day.

The technology-dominated Nasdaq composite index finished down 11.94, or 0.49 percent, at 2,404.21, following an earlier drop of 56 points.

Stocks plunged Tuesday amid escalating worries that the U.S. and Chinese economies are slowing, exacerbated by a huge decline in Chinese stocks and comments from former Fed Chairman Alan Greenspan that a U.S. recession is a possibility. A day later, they managed an anemic recovery as Bernanke predicted the U.S. economy would continue to grow moderately.

The market appears to be trading in a pattern similar to past downturns: dropping sharply one day, regaining some ground the next and then resuming its slide, waffling due to investors’ inability to recoup their lost conviction in stocks.

“The early morning hours raised the concern that we haven’t hit our bottom yet,” said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. “It’s probably going to be a grinding, sideways movement over the next few days as people realize there are risks out there.”

Bond prices rose on weak stocks Thursday, pushing the yield on the benchmark 10-year Treasury note to 4.55 percent from 4.57 percent late Wednesday.

Gold prices fell, while the dollar rose against most major currencies, with the exception of the Japanese yen. The dollar has been losing ground to the yen, as traders unwind yen “carry trades” – borrowing the low-yielding yen to invest in the higher-yielding dollar, a technique that many market watchers say accelerated the U.S. market’s recent decline. The dollar traded at 117.59 yen at the stock market’s close on Thursday, down from Wednesday’s levels but up from an earlier low of 116.94.

U.S. investors began the day rattled by another series of declines in Asian and European markets.

“It’s kind of the tail wagging the dog today. There’s no stability in Asian markets, and no stability in European markets. We’re trading the market as the rest of the globe is,” said Arthur Hogan, chief market analyst at Jefferies & Co.

Overseas, Japan’s Nikkei stock fell 0.86 percent, and the Shanghai Composite Index lost 2.9 percent. Britain’s FTSE 100 fell 0.90 percent, Germany’s DAX index tumbled 1.12 percent, and France’s CAC-40 dropped 1.05 percent.

But the U.S. market began recovering by midmorning, as investors examined the U.S. economic reports released Thursday.

“As far as data goes, there’s more good news than bad news,” Hogan said.

The Commerce Department said personal incomes rose in January at the fastest pace in a year, fueled in part by executive bonuses and pay hikes for federal workers. Meanwhile, consumer spending was up 0.5 percent; a confident consumer willing to spend is a good sign for Wall Street that the economy won’t slow down too suddenly.

The report also showed inflation excluding often volatile energy and food prices rose 0.3 percent in January, the largest one-month gain since August. But the gauge that leaves in energy and food rose by 0.2 percent, and moderated to 2 percent year-over-year – at the top of the Fed’s 1 percent to 2 percent target.

Not all the economic reports Thursday inspired confidence: Construction activity fell by 0.8 percent in January, double the decline analysts expected, while the Labor Department reported that the number of newly laid off workers filing claims for unemployment benefits rose by 7,000 last week to 338,000. Economists expected a drop in claims.

But taken together, recent data still paint a picture of moderating economic growth and cooling inflation – technically, an ideal long-term situation for stocks.

“The fear of recession is overblown. I don’t think we’re headed for recession in 2007,” Cardillo said.

Until the stock market stabilizes, though, every piece of data released will be gnawed on and digested by jumpy investors, meaning a single snippet of bad news could trigger another huge selloff.

Friday won’t bring much in a way of new economic information, except for a consumer sentiment report from the University of Michigan and a speech by St. Louis Fed President William Poole. Investors may look more at corporate data, especially in the technology sector, given Dell Inc.’s preliminary earnings report released Thursday after the bell.

The computer maker saw its fourth-quarter profit fall sharply Thursday as revenue declined by 4 percent. Dell fell 46 cents in after-hours trading from its closing price of $23.01.

Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange, where consolidated volume came to 3.92 billion shares – just shy of Wednesday’s volume of 3.93 billion shares, but much lighter than the 4.56 billion shares traded Tuesday.

The Russell 2000 index of smaller companies fell 2.27, or 0.29 percent, to 791.03.

Meanwhile, oil prices rose for the seventh day in a row to settle at $62.11 a barrel Thursday on the New York Mercantile Exchange, the highest level in more than two months, as declining product supplies overshadowed traders’ concerns about volatile global stock markets.