Wall Street stocks rebounded on Friday but early gains were halved after new home sales hit their lowest rate in more than 12 years.

Traders looked to buy into weakness after a sharp sell-off on Thursday sparked by the assassination of Benazir Bhutto, the leader of one of Pakistan's main opposition parties, and some weak data on US durable goods orders.

Investors bought energy stocks as crude oil prices soared but also showed a preference for consumer staples and healthcare, indicating that they remained in a defensive mood.

At midday the S&P 500 was up 0.4 per cent at 1,481.88, having earlier gained up to 0.8 per cent. The S&P was on pace for a 0.2 per cent decline this week - a trading period shortened by the Christmas holiday. The Nasdaq Composite was 0.2 per cent lower for the week at 2,685.56 while the Dow Jones Industrial Average was down 0.4 per cent at 13,392.77 for the period. Small-cap stocks fared poorly. The Russell 2000 fell 0.9 per cent this week and is poised to underperform the S&P this year for the first time in eight years.

Homebuilders suffered sharp losses after new home sales fell 9 per cent to an annual rate of 647,000 in November, much more than economists had anticipated. The previous month's sales figures were also revised sharply lower.

Although the number of unsold homes on the market fell, the slower sales rate increased the inventory backlog to a 9.3 month supply, a 5.7 per cent increase

"The homebuilder industry is over for the next 10 years in the US. There's no point in building homes - there's a glut of unsold homes on the market," Peter Schiff, president of Euro Pacific Capital said.

The S&P homebuilder index fell 3 per cent to 359.13 for a 1.3 per cent decline this week. KB Home fell 7.3 per cent to $21.19 over the period.

The credit insurance sector was in focus yesterday after Warren Buffett, the billionaire investor, prepared to launch a municipal bond insurance unit, posing a threat to monoline insurers struggling to cope with turmoil in credit markets.

US bond insurers have come under increasing pressure to shore up their capital levels amid rating agency threats of credit downgrades because of their exposure to high-risk debt securities.

MBIA (NYSE:MBI) fell 2.5 per cent to $19.53 and Ambac Financial shed 2.3 per cent to $26.04.

Separately, Berkshire Hathaway, Mr Buffett's conglomerate, agreed to buy a reinsurance unit from ING Group, the Dutch financial services company, for about $433m. It was Berkshire's second deal this week, following its purchase of a controlling stake in Marmon Holdings, the manufacturing and services group.

There was more good news for the industrial sector after twin reports showed a pick-up in business activity in the mid-west and New York this month.

Financials were again a drag on the major indices this week after Goldman Sachs (NYSE:GS) warned that it expected three banks - Citigroup (NYSE:C), Merrill Lynch and JPMorgan - to share $33.6bn in writedowns in the fourth quarter. Merrill Lynch fell 4.6 per cent to $52.95 in spite of securing a $6.2bn capital injection from Singapore's Temasek Holdings and Davis Selected Advisers.

Traders were disappointed that Merrill sold stakes at a discount to its market price. Sallie Mae fell 0.8 per cent to $19.70 after the troubled student lender sold $1bn of convertible securities and $2bn of common stock to pay off derivative bets that went sour. Energy stocks made solid gains as concerns about supply and a spike in geopolitical tension caused crude oil prices to surge back towards $100 a barrel.

Among the chief beneficiaries were Hess, the oil producer and refiner, up 4.9 per cent at $102.82 and Transocean (NYSE:RIG), the world's largest offshore drilling company, 2.7 per cent higher at $147.77. Weatherford International (NYSE:WFT), an oilfield services company, rose 3.8 per cent to $71.06.

Companies in the materials sector also profited from a spike in commodity prices, with Alcoa (NYSE:AA) on pace for a 2.3 per cent rise to $37.17 while United States Steel (NYSE:X) climbed 3.8 per cent to $119.55.

However, the transport sector continued to struggle as energy costs looked poised to soar. Airlines felt particularly heavy selling pressure. JetBlue (NASDAQ:JBLU), the low-cost carrier, fell 5.7 per cent to $6.03 while UAL, parent of United Airlines, declined 4.5 per cent to $34.13.

Retailers were in focus as investors studied early indicators for the Christmas shopping period. Macy's, the department store operator, was down 5.4 per cent at $25.11 and Dillard's was 4.7 per cent lower at $18.55.