Wall Street sags after Bernanke's "fiscal cliff" comments

NEW YORK (Reuters) - Stocks fell on Tuesday following a two-day rally, after Federal Reserve Chairman Ben Bernanke said the central bank lacks tools to cushion the economy from the impact of the "fiscal cliff."

Bernanke, in comments before the Economic Club of New York, said the Fed does not have the tools to offset the damage that would result if politicians fail to strike a deal to prevent going off the fiscal cliff. If a solution isn't approved in time, then mandatory tax increases and spending cuts will go into effect early next year.

Bernanke also said he does not believe the possible benefits of cutting the interest it pays on bank reserves are sufficient to outweigh the risk of trouble in money markets.

"This is a more realistic and pragmatic picture of where we are, compared to what we've been hearing for the past couple of days from politicians that are mostly PR stunts," said James Dailey, portfolio manager at TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

Stocks had rallied for the last two sessions on optimism that Washington politicians could agree on a deal to avoid the U.S. fiscal cliff. But the gains followed two weeks of sharp losses.

The Dow Jones industrial average <.dji> was down 22.73 points, or 0.18 percent, at 12,773.23. The Standard & Poor's 500 Index <.spx> was down 1.38 points, or 0.10 percent, at 1,385.51. The Nasdaq Composite Index <.ixic> was down 6.49 points, or 0.22 percent, at 2,909.58.

Hewlett-Packard Co shares sank 11.9 percent to a 10-year low at $11.72 as the computer and printer maker swung to a fourth-quarter loss. The company said it took an $8.8 billion charge in the quarter, with $5 billion related to its acquisition of software firm Autonomy, citing "serious accounting improprieties.

Best Buy Co shares fell 12.7 percent to $12 after the consumer electronics retailer reported a net loss of $13 million for the third quarter on weaker-than-expected sales at its established stores.

Another factor weighing on stocks was Moody's Investors Service's reduction of France's sovereign rating by one notch to Aa1 after the market's close on Monday. Moody's cited an uncertain fiscal outlook as a result of the weakening economy.

"This brings forward a whole new set of problems to the euro -zone issue. When the lifeguards, in this case, Germany and France, are in trouble, when they need to save people like Greece and Spain, that could be a big concern," Dailey said.

(Reporting by Angela Moon; Editing by Jan Paschal)

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Wall Street sags after Bernanke's "fiscal cliff" comments