Wall Street stocks were set for modest gains on Friday after Citigroup (NYSE: C - News) posted better-than-expected earnings, offsetting some poor results from the likes of Google (NASDAQ: GOOG - News) , Microsoft and Merrill Lynch.

Citigroup, the biggest US bank by assets, said it lost $2.5bn in the second quarter after about $7.2 billion of credit-market writedowns. That was a significantly smaller loss than the $3.67bn analysts were expecting.

Citigroup has been the financial institution worst hit by the current credit and housing crisis and the economic slowdown that has accompanied them. So far the bank has lost some $50bn forcing it to raise about $44bn in new capital.

The results led some analysts to conclude that the worst might be over for the beleaguered bank. Citigroup is shrinking its balance sheet, selling off non-core assets and restructuring itself under the management of Vikram Pandit, the chief executive who took over in December.

Citigroup shares jumped 9.5 per cent to $19.67 in pre-market trade.

The results follow a series of surprisingly healthy earnings reports from JPMorgan, Wells Fargo and PNC Financial Services Group. Those banks and brokerages all posted better-than-expected results helping financial stocks to rally sharply over the last two sessions.

In pre-market trading JPMorgan rose 0.5 per cent to $41, Wells added 0.5 per cent to $27.98 and PNC Financial Services edged up 0.5 per cent to $66.10.

But poor second-quarter results overnight from the Merrill Lynch highlighted that the fallout from the credit crunch is far from over and continues to eat away at both confidence and bank capital.

Merrill Lynch broke with tradition to wait until after the market closed before reporting larger-than-expected writedowns of $9.4bn, a $4.6bn loss and asset sales aimed at raising $8bn in capital.

The performance, which trailed analyst expectations, brings Merrill's losses for the past four quarters to about $19bn and has left the battered investment bank as one of the biggest casualties of the financial turmoil.

Merrill fell 3.4 per cent to $29.70 in pre-market trade.

Dramatic moves by the government this week to shore up Fannie Mae (NYSE: FNM - News) and Freddie Mac, the two mortgage giants, were also cautionary.

Even though the Treasury announced a rescue plan that could see the government take an equity stake in the companies, shareholders were unimpressed and markets plunged on Monday and Tuesday.

It took the announcement of emergency rules limiting certain types of short-selling in the government sponsored entities and brokerage stocks to turn sentiment. A rapid drop in the price of oil, about $15 in three days, was crucial too.

The roller-coaster ride is not yet over. On Friday, the Wall Street Journal reported Freddie Mac might raise up to $10bn by selling new shares.

Freddie shares rose 3.2 per cent to $8.60 in pre-market trade while Fannie Mae added 5.6 per cent to $11.57. Over the past week the two GSE's share prices have lost and gained as much as 30 per cent on single days.

Claire Collingwood, a dealer at CMC Markets, said: "The fact remains that the bank reporting season continues to impress and combining this with falling oil prices, many traders seem intent on finishing the week on a positive note."

Less than an hour before the opening bell on Friday, S&P 500 futures were up 7.4 points at 1,260.80 while Nasdaq futures were up 3.5 points at 1,843.25.

Futures for the Dow Jones Industrial Average were up 49 points at 11,450.

Some deal news also lifted markets, Teva Pharmaceutical Industries, the generic drug maker, agreed to buy rival Barr Pharmaceuticals for $7.46bn.

The generic drug industry is undergoing a wave of consolidation as companies seek to expand in new markets and keep ahead of competition.

Barr rose 8.5 per cent to $62 in pre-market trade.

Still, poor results from technology bellwethers, Google, Microsoft and Advanced Micro Devices also sent shivers through the market, indicating that sector will likely not escape the current economic slowdown unscathed.

Google reported earnings that missed analysts' estimates, noting that growth in the number of consumers clicking on Web ads had slowed and pointing to higher-than-expected research and legal expenses.

Microsoft also reported earnings and forecast sales and profit that undershot analysts' estimates, as its Office programs missed sales targets for a second straight quarter.

Meanwhile, a seventh straight quarterly loss at AMD prompted the company to replace its chief executive. The company blamed "challenging macroeconomic conditions" for the continued underperformance.

However, strong numbers from IBM helped steady nerves somewhat. The company reported a 22 per cent increase in profit for the second quarter on sales of $26.8bn - well ahead of estimates.

IBM has a large international business and so is less reliant on the sluggish US market for profit and revenue growth. IBM raised its full-year 2008 forecast.

In pre-market trading Google fell 7.2 per cent to $485.10, Microsoft lost 4.8 per cent to $26.20 while AMD slid 6.6 per cent to $4.95. IBM rose 0.8 per cent to $127.48.

European stocks were higher ahead of the open on Wall Street, reversing early losses on the Citigroup results. By midday in London, the benchmark FTSE Eurofirst 300 was up 0.3 per cent to 1,150.20.

Asian equity markets closed mainly mixed. In Tokyo, the Nikkei 225 closed down 0.7 per cent to 12,803.70.The broader Topix closed down 0.9 per cent at 1,252.43.

Bond yields were higher. The yield on the two-year Treasury note advanced 9 basis points to 2.58 per cent while the yield on the benchmark 10-year security climbed 7 basis points to 4.06 per cent.

The dollar was largely unchanged against major currencies early in New York. In overnight trade the dollar was 0.1 per cent higher against a basket of six major currencies and flat against the euro at $1.5857.

Gold was trading $8 higher at $970.70 per troy ounce.

Oil prices were higher early in New York. US crude prices were up $0.79 at $130.08 a barrel.