Dow comes back from 180-pt deficit; fears 'overblown'

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Stocks hit by Europe worries; Dow down triple digits
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U.S. stocks retained modest losses on Thursday, after recouping the bulk of a steep drop, as worry eased over trouble at one of Portugal's top banks and its potential impact about the health of Europe's recovery.

"We'll have to get bigger, worse news than we've been getting to have a sustained decline," said Kim Forrest, senior equity analyst at Fort Pitt Capital.

The market's comeback from hefty declines could be as simple as people suffering from "non-participant remorse" opting to step in when they see a buying opportunity, said Forrest, who added: "anytime they see a dip like this, they'll go on; I think that's true of institutional investors too."

The market's initial unraveling came after Espirito Santo Financial Group (:EST-LU), the biggest stakeholder in Portugal's Banco Espirito Santo (Euronext Lisbon: BES-PT), suspended trading in its shares and bonds, citing "material difficulties" at parent ESI.

"Not knowing something is a catchphrase for contagion and added volatility, and we've seen both of those injected into U.S. markets in no uncertain terms," said Andrew Wilkinson, chief market analyst at Interactive Brokers..

That said, "fears were perhaps overblown" and Wall Street early reaction seems "excessive, given the size of Portugal and the potential for" reigniting a financial-system crisis in the euro zone, given there's little reason to believe that European authorities would not deal with the potential collapse of one of Portugal's largest banks in a prompt and orderly manner, Wilkinson added.

Peter Boockvar, chief market analyst at the Lindsey Group, had a bleaker take, saying the country-specific news from Europe "is a reminder that the region is barely growing, and their economy is as big as ours."

Investors had sought safety in U.S. Treasuries and gold , with the yield on the benchmark 10-year note (U.S.:US10Y) lately off 1 basis point at 2.541 percent andgold futures (CEC:Commodities Exchange Centre: @GC.22) jumping $15.60, or 1.2 percent, to $1,339.909 an ounce on the New York Mercantile Exchange.

The Chicago Board Options Exchange Volatility Index (^VIX), a measure of investor uncertainty, gained half a point, or 3.9 percent, to 12.10.

Coming back from an 180-point deficit, the Dow Jones Industrial Average (Dow Jones Global Indexes: .DJI) was lately down 35.82 points, or 0.2 percent, at 16,949.79, with Home Depot (HD) falling hardest among its 30 components, 19 of which were in the red.

Home Depot fell, along with other home-improvement retailers, after Lumber Liquidators Holdings (LL) cut its earnings outlook for the year.

Read More Midday movers: AmREIT, Home Depot, L Brands & More

Energy led sector declines and utilities paced gains on the S&P 500 (^GSPC), which dropped 3.92 points, or 0.2 percent, to 1,968.91.

The Nasdaq (^IXIC).declined 4.87 points, or 0.1 percent, to 4,414.15.

For every share rising, less than two fell on the New York Stock Exchange, where 347 million shares traded by 1:45 p.m. Eastern. Composite volume neared 1.9 billion.

Ahead of Thursday's open, Wall Street bypassed another upbeat indicator on the U.S. jobs market, with stock-index futures only furthering their fall after applications for jobless benefits last week fell by 11,000 to a better-than-expected 304,000.

"We know the labor market has improved, that is not the issue. The market is facing what is going on in Europe and a Fed that is just a few meetings away from ending QE3," said Boockvar of expectations that the central bank's latest round of quantitative easing would end in October.

Read More US jobless claims flirt with 300K, eye post-recession lows

"Portugal's bank still has a problem, no matter what jobless claims were," said JJ Kinahan, chief strategist at TD Ameritrade.

Stocks slightly reduced their losses after data had wholesale inventories climbing 0.5 percent in May, pointing to a rebound in second-quarter GDP.

Read More Wholesale inventories gain in May, helping to feed growth optimism

However, Boockvar said the report had nothing to do with the market coming off session lows.

"It's never a market-moving number; the first half hour of trading has its own dynamic, and then things settle out and we get to see what happens," Boockvar said.

On Wednesday, U.S. stocks climbed, recouping a chuck of the prior two-day drop, after minutes from the Federal Reserve's last meeting noted an improving economy and labor market, while setting the stage for the central bank's eventual exit from its course of monetary easing.

Read More Stocks end higher after 2 day drop; end of QE in view

-By CNBC's Kate Gibson

Coming Up This Week:

Friday

Earnings: Wells Fargo, Infosys, Fastenal

2:00 p.m.: Federal budget

2:45 p.m.: Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans

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