NEW YORK — Wall Street lost more ground in extremely volatile trading yesterday, as investors recoiled at a cautious economic outlook from a Federal Reserve official and the possibility of more financial troubles at Fannie Mae and Freddie Mac.

The Dow Jones Industrial Average fell 56.58, or 0.50 percent, to 11,231.96. Over the course of the day, the blue chips rallied, tumbled, rebounded, and then fell once more. The Dow fell as much as 167.80, to 11,120.74 — its lowest trading level since Aug. 15, 2006 — but was also up more than 100 in early trading.

Broader stock indicators also declined. The Standard & Poor’s 500 index fell 10.59, or 0.84 percent, to 1,252.31, and the Nasdaq composite index fell 2.06, or 0.09 percent, to 2,243.32.

Stocks of Rhode Island importance fell, led by General Dynamics Corp. and Washington Trust Bancorp Inc. The Bloomberg Rhode Island Index, a price-weighted list of companies with operations in the region, fell 2.79, to 237.03. General Dynamics fell $1.43, to $81.79. Washington Trust fell $1.18, to $18.79.

The market found only slight solace in retreating oil prices.

San Francisco Federal Reserve President Janet Yellen said in a speech that financial markets remained fragile, and that it will take time for conditions to improve. “My expectation is that market functioning will improve markedly by 2009,” she said. “But things could get worse before they get better.”

The comments added to concerns raised in a note by Lehman Brothers analysts that Fannie and Freddie may need to raise more capital as the credit crisis continues. Worries about the ailing financial sector deflated a stock rally early in the day that had been fueled by a $4-a-barrel pullback in oil prices.

The market managed, however, to rebound from its lows of the day, when the Dow sank to its worst level since mid-August of 2006. Some investors bought back into the market to take advantage of the low prices.

The technology-dominated Nasdaq got a modest boost from Yahoo Inc., which rose $2.56, or 12 percent, to $23.91, after Microsoft Corp. expressed support for investor Carl Icahn’s effort to oust Yahoo’s board next month. Microsoft said a successful rebellion would encourage it to renew its takeover bid for Yahoo, or negotiate another deal.

Light, sweet crude oil fell $3.92 to close at $141.37 a barrel on the New York Mercantile Exchange, after dropping by more than $5 a barrel at times.

The retreat did little to assuage fears about high energy prices, however. Wall Street, which has been hurtling stocks lower for the past few weeks, remains fearful that consumers are trimming their spending to pay for gasoline. With consumer spending accounting for more than two-thirds of U.S. economic activity, a pullback could create big ripples.

Government bonds rose. The 10-year Treasury note’s yield, which moves opposite its price, fell to 3.91 percent, from 3.98 percent last Thursday.

Fannie Mae fell $3.04, or 16.2 percent, to $15.74, and Freddie Mac fell $2.59, or 17.9 percent, to $11.91, after Lehman Brothers analysts said new accounting rules could require Fannie to raise $46 billion more capital and Freddie to raise $29 billion.

Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. also saw their shares fall ahead of their earnings reports, due later this month. Citi fell 42 cents, or 2.5 percent, to $16.40; JPMorgan dropped $1.27, or 3.6 percent, to $34.04; and Bank of America fell 87 cents, or 3.9 percent, to $21.53.

In addition to financials, Merck & Co. dragged on the Dow, falling $1.85, or 4.8 percent, to $36.60. A UBS analyst downgraded the drug maker, citing slowing sales of its HPV treatment Gardasil.

Meanwhile, General Motors Corp. said it is considering cutting more white-collar jobs and getting rid of some brands, according to a person familiar with the company’s discussions. The person asked not to be identified because no decisions have been made. GM shares, which recently sank to all-time lows, rose 12 cents, to $10.24.

Yesterday, the dollar traded mixed against other major currencies, while gold prices fell.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange. Consolidated volume came to 5.21 billion shares, up from 3.19 billion shares on Thursday.

The Russell 2000 index of smaller companies fell 7.52, or 1.13 percent, to 658.26.

Overseas, Japan’s Nikkei stock average rose 0.92 percent. Britain’s FTSE 100 rose 1.85 percent, Germany’s DAX index rose 1.97 percent and France’s CAC-40 advanced 1.80 percent.