Oil falls sharply and stocks gain on Lehman hopes

Oil prices fell sharply on Friday in their biggest one-day slide since 2004, helping lift stocks that rallied early in the day on hopes battered U.S. investment bank Lehman Brothers will gain a major investor.

The possible bailout of Lehman, viewed as one of the Wall Street firms most exposed to the housing debt crisis, restore some of the confidence Wall Street has lost as banks struggle to raise funds.

Shares of big manufacturers, including United Technologies (UTX.N: Quote, Profile, Research), airlines and consumer-oriented companies also benefited from oil’s slide, which curbed inflation concerns and led U.S. and euro zone government debt prices lower.

Remarks by Federal Reserve Chairman Ben Bernanke, who suggested U.S. interest rates would stay on hold, also cut into the safe-haven appeal of bonds.

The dollar drifted back from its highs on Bernanke’s comments because some currency traders have been anticipating U.S. yields will outpace rates in other countries.

The euro was on track for its best weekly gain versus the dollar since mid-July, despite Friday’s losses.

Prospects of a Lehman white knight added to upbeat investor sentiment that was aided by soothing remarks from influential U.S. investor Warren Buffett. Investors turned to the higher risk of equities and away from the relative safety of debt.

Lehman, whose shares have lost nearly 80 percent of their value this year, has taken $7 billion (3.7 billion pounds) in write-downs and several brokerages this week forecast more.