NEW YORK (AP) - Wall Street managed a moderate gain in an erratic session yesterday as investors sorted through a downbeat Federal Reserve assessment of the economy and were also disappointed by a plan to bail out troubled bond insurer Ambac Financial Group Inc.

The Fed's Beige Book report on regional economies indicated growth at the start of the year was sluggish and accompanied by rising price pressures. The report also cited tighter credit standards.

Meanwhile, Ambac said it plans to issue more than $1 billion in common stock to help shore up its battered balance sheet. Investors had hoped for a contribution from global banks to help Ambac, whose plan will dilute its outstanding shares.

Investors remain nervous about how the fallout from the global credit crisis will hurt financial companies. Recent speculation that Citigroup Inc. might log significant write-downs from exposure to sub-prime mortgage-related securities only exacerbated those fears.

"I think it's more the Ambac" news, said Dave Rovelli, managing director of US equity trading at Canaccord Adams, said referring to traders' expectations about a bailout for the bond insurer. That's just not what they were looking for."

The Dow Jones industrials were up as much as 120 points earlier in the session after a stronger-than-expected reading on the health of the service sector and figures on worker productivity calmed fears about the economy.

According to preliminary calculations, the Dow rose 41.19, or 0.34 percent, to 12,254.99.

Broader stock indicators were higher. The Standard & Poor's 500 index added 6.95, or 0.52 percent, to 1,333.7, while the Nasdaq composite rose 12.53, or 0.55 percent, to 2,272.81.

Bond prices fell sharply after Ambac's announcement. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.69 percent from 3.63 percent late on Tuesday.

The dollar was mixed against other major currencies, while gold prices rose.

Oil surged, rising a remarkable $5 a barrel to a new record over $104 a barrel after the government reported a surprise drop in crude oil stockpiles and OPEC held production levels steady. Light, sweet crude for April delivery jumped $5 to settle at a record $104.52 a barrel on the New York Mercantile Exchange after earlier rising to $104.64.

The plan put forth by Ambac unsettled traders who had hoped the bond insurer would unveil a capital infusion from a sovereign wealth fund or a consortium of banks. Instead, the issuance of new shares was seen as a more passive way of dealing with Ambac's efforts to stay afloat and maintain its top credit ratings.

Shares of Ambac plunged $2.02, or 18.8 percent, to $8.70. The stock, which was up steeply ahead of the announcement, had once traded at about $90 before the credit crisis began to unfold.

Rival MBIA Inc. also fell, down 80 cents, or 6.2 percent, to $12.18. That company also faces pressure to maintain high scores with the three major credit rating agencies.

The Beige Book, which outlines economic conditions in various parts of the country, appeared to unnerve investors after it showed economic growth has slowed since the start of the year. The report, which arrives two weeks before the central bank's next meeting, found that eight of the dozen Fed districts saw "softening or weakening" in the pace of business activity. The others saw "subdued, slow, or modest growth."

"The Beige Book does look weak," said economist Edward Yardeni, who runs his own research firm. "There isn't much to suggest that things are improving."

Earlier in the session, the Institute for Supply Management reported activity in the service sector declined in February, though the decrease wasn't as steep as Wall Street feared. The data was particularly gratifying to investors after a stunning drop in the January service sector index had sent stocks plunging when it was released a month ago.

The service sector findings offset some unease about a Labour Department report that showed labour costs rose at a 2.6 percent annual pace in the fourth quarter.

Rising costs often draw concern from investors because the increases can make it harder for the inflation-wary Federal Reserve to justify cutting interest rates to boost the economy.

John Merrill, chief investment officer at Tanglewood Capital Management in Houston, said he is sceptical about a rally given the economic figures arriving since late last year.

He also said the market is waiting for any kind of indication that major financial institutions have begun to battle back from credit problems.