Stocks edge lower on corporate gloom

NEW YORK (Reuters) - Stocks edged lower on Tuesday, as worries about the quality of upcoming earnings from economic bellwether General Electric offset a gain in financials chalked up on bets that the U.S. government could take toxic assets off bank books.

General Electric was among the Dow's biggest weights after an analyst said its profit could rely more heavily on tax benefits than expected, although trading was volatile, with indexes veering to both sides of the break-even mark.

The worries added to investors' fears about what may be a gloomy earnings season the day after Alcoa reported a bigger quarterly loss than expected. The aluminum producer was down more than 5 percent.

Shares of biotechnology companies were among the few sectors expected to show earnings growth.

"This earnings season is going to be very important," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

"Even though expectations are very low, if we were somehow to get worse news than expected, I think that's going to be a big headwind for the market."

The Dow Jones industrial average fell 47.55 points, or 0.56 percent, to 8,426.42. The Standard & Poor's 500 Index was down 2.32 points, or 0.27 percent, at 867.94. The Nasdaq Composite Index lost 0.76 points, or 0.05 percent, to 1,538.03.

The financial sector, at the heart of the credit crunch and global economic slowdown, provided a boost after Federal Reserve Chairman Ben Bernanke said in a speech in London that more steps were needed to stabilize banks, reviving the idea of authorities sopping up toxic assets from bank balance sheets.

Optimism that Washington would work quickly on a plea by U.S. President-elect Barack Obama for the remaining $350 billion of financial rescue funds to stabilize credit markets helped offset some of the gloom, as did news the U.S. trade deficit had its biggest contraction in 12 years in November.

The S&P Financial index rose 1.4 percent, while Citigroup rose 3.2 percent to $5.78 on the New York Stock Exchange, a day after sliding 17 percent.

CNBC said Chief Executive Vikram Pandit was expected to make an announcement about a new corporate direction.

Citigroup is pushing ahead with a plan to sell a controlling stake in its Smith Barney retail brokerage, a crown jewel, and analysts suggested it must be urgently seeking to replenish capital due to mounting losses.

On the downside, industrial shares dragged, including Boeing , which gave up 3.5 percent at $42.23. Credit Suisse downgraded the company and removed it from its U.S. focus list on concerns over problems with Boeing's 787 Dreamliner program.

GE was down 5.6 percent at $14.94, while Alcoa fell 5.1 percent to $9.55.

(Editing by James Dalgleish)