President Bush said Tuesday he was "disappointed" by the House's rejection of the $700 billion bailout plan and urged Congress to take action to save the economy.

"Unfortunately, the measure was defeated by a narrow margin," Bush said in a brief televised address at the White House. "I'm disappointed by the outcome, but I assure our citizens, and citizens around the world, that this is not the end of the legislative process."

Bush said he expects lawmakers to move forward with legislation. The House is adjourned for the Jewish holiday Rosh Hashanah and is not scheduled to return to session until Thursday at noon. The Senate is in session on Tuesday.

Senate Majority Leader Harry Reid, D-Nev., said that he would meet with some key Democratic senators - including Senate Banking Committee Chairman Christopher Dodd, D-Conn. - working on a bailout plan.

For his part, Bush said the nation is facing "the real prospect of economic hardship."

"Our economy is depending on decisive action from the government," Bush said. "The sooner we address the problem, the sooner we can get back on the path of growth and job creation. This is what elected leaders owe the American people, and I am confident that we'll deliver."

Bush is meeting with his team Tuesday morning to review options, a senior Bush administration official told CNN. On Monday night, White House staffers were in contact with Republican congressional leaders and Democratic staffers, the official said.

The official said that even Republicans who oppose the plan understand the seriousness of the situation and "want to get this done."

The Senate's lead Republican, Sen. Mitch McConnell, R-Ky., said Tuesday that lawmakers will pass a bill. "I want to reassure the American people that we intend to pass this legislation this week," he said.

On Tuesday, Bush spoke to Sens. Barack Obama and John McCain about the financial crisis, according White House spokesman Tony Fratto. The presidential candidates "offered ideas and reaffirmed what they have said publicly - that this is a critical issue that needs to be addressed," Fratto said.

Stock market reaction
The bailout package, a collaboration of Treasury Secretary Henry Paulson and leaders from both parties, was rejected by the House in a 228-205 vote Monday. Two-thirds of Republicans and about one-third of Democrats voted against the bill.

Following the defeat, the Dow Jones industrial average dropped 777 points, its biggest one-day point decline ever. The decline of nearly 7% was the largest percentage decline since the Black Monday crash of 1987.

The bill, if approved, would have allowed the federal government to buy troubled mortgage-related investments from finance companies, freeing them up for lending, to pull the economy out of its credit freeze. Proponents of the bill believe it would prevent the United States from sliding into a serious financial crisis, but opponents saw it as an unbearable burden to taxpayers and a rescue for Wall Street.

"That, no question, is a large amount of money," said Bush, referring to the $700 billion. "We're also dealing with a large problem. But to put that in perspective, the drop in the stock market yesterday represented more than a trillion dollars in losses."

Mortgage insurer Genworth Financial Inc. said Tuesday that it is considering various strategic alternatives for its U.S. mortgage-insurance business including a possible spin off, sending shares sharply higher in premarket activity.

"We have demonstrated that, in the current stressed U.S. housing environment, our U.S. Mortgage Insurance business continues to operate from a more sound financial position and lower risk profile than any other U.S. mortgage insurer," said Michael D. Fraizer, chairman and chief executive, in a statement.

"At the same time, progress in our international, wealth management, retirement, life and long-term care insurance businesses has been overshadowed by concerns about the future of U.S. mortgage insurance," he added.

Commercial paper
Genworth (GNW, Fortune 500) said it has reduced its commercial paper borrowings to $79 million, and maintains more than $800 million in cash and cash equivalents at the holding company.

The company also carries nearly $4 billion of cash and cash equivalents in its operating companies, and maintains substantial credit facilities, Genworth said.

Over the past couple of weeks, Genworth's stock has been hit hard by concerns about its mortgage exposure in the wake of the collapse of American International Group Inc.

Earlier this month, the government stepped in and provided AIG with a two-year $85 billion loan to help keep it in business. As one of the world's largest insurers, AIG teetered on the brink of bankruptcy as it looked for fresh cash to help shore up its balance sheet, which was facing a liquidity crunch amid the continued downturn in the credit markets.

Reinsurance business
Last week, Genworth management provided an update regarding its U.S. mortgage insurance business. The company is considering reinsurance transactions, asset transfers from outside the U.S. and joint ventures to boost capital, management said on a call with analysts.

Shares of Genworth spiked $1.49, or 30%, to $6.49 in premarket activity. The stock, which finished Monday's trading at $5, has ranged from $3.51 to $32.33 over the past year.

A closely watched index released Tuesday showed home prices tumbling by the sharpest annual rate ever in July, but the rate of monthly declines is slowing.

The Standard & Poor's/Case-Shiller 20-city housing index fell a record 16.3% in July from a year earlier, the largest drop since its inception in 2000. The 10-city index plunged 17.5%, the biggest decline in its 21-year history.

No price gains
Prices in the 20-city index have plummeted nearly 20% since peaking in July 2006. The 10-city index has fallen more than 21% since its peak in June 2006.

No city in the Case-Shiller 20-city index saw annual price gains in July, the fourth straight month that has happened.

However, the pace of monthly declines is slowing, a possible silver lining. Between May and July, for example, home prices fell at a cumulative rate of 2.2% - less than half the cumulative rate experienced between February and April.

But there's "no evidence of a bottom," said David M. Blitzer, chairman of the index committee at S&P.

Trouble in Vegas
Las Vegas prices plunged the most at nearly 30%, with Phoenix diving 29% and Miami 28%. Prices in the seven cities in the Sunbelt all fell between 20% and 30% from a year ago.

Only seven cities showed positive or flat returns from June to July, down from nine that showed month-over-month gains in June. Atlanta, Boston, Dallas, Denver and Minneapolis all posted positive returns for three months or more.

Apple (AAPL) got hit with a pair of downgrades Monday as analysts see a weaker consumer taking a big bite out of the computer-maker’s growth rate.

RBC and Morgan Stanley analysts slapped Apple with neutral ratings, down from buy, on concerns that the slumping economy will put a chill on sales of Mac notebooks and desktop computers.

Citing a IQ/Changewave survey, RBC noted that 40% of consumers questioned said they “plan on spending less on electronics in the next 90 days,” RBC analyst Mike Abramsky wrote in the note. This is the weakest outlook ever measured in these surveys, Abramsky wrote.

Apple shares fell 16% in morning trading Monday in the wake of the reports, as investors get a sobering view of how popular consumer devices can lose momentum in a faltering economy.

The growing credit crisis has helped deflate consumer confidence and force delays in purchases of items like new computers and flat-screen TVs. The problem for Apple, writes Kathryn Huberty in a downgrade of Apple to neutral Monday, is that not only is PC sales growth slowing but the one area shrinking less is the under-$1,000 price range where Apple is absent.

Add the slowdown in PC sales to the higher costs of iPhone production, and Huberty says there will be a dramatic drop in Apple’s profit growth. Huberty cut her Apple earnings growth projection for the year to 6%, well below the 9% analysts’ consensus average.

Apple is not recession proof, RBC’s Abramsky writes.

Not surprisingly, investors have taken flight from stocks in some of the stronger players as the market jitters spread across nearly all sectors. Apple shares are down 35% and smartphone rival Research in Motion (RIMM) is down 47% in the past month.

RIM’s disappointing outlook Thursday confirmed that the once hot smartphone segment is cooling just as the larger mobile phone market grinds into slow gear, not just in the U.S., but globally as Nokia (NOK) recently pointed out.

The U.S. dollar rose against other major currencies Monday as turmoil in the European economy undercut the euro and the pound.

The 15-nation currency fell to $1.4468 in New York, down from $1.4615 on Friday.

The British pound was quoted at $1.8160, down from $1.8417. And the Japanese yen fell to ¥104.43 from ¥106.14.

The dollar's strength comes as the crisis on Wall Street appears to be spreading to the European financial system.

In Germany, government regulators and several banks tossed a multibillion euro line of credit to Hypo Real Estate Holding AG in move aimed at preventing the country's second largest commercial property lender from going under.

Meanwhile, the British government announced plans to nationalize troubled mortgage lender Bradford & Bingley, taking over the bank's $91 billion mortgage and loan books, in a bid to help stabalize the country's financial stability.

Over the weekend, the governments of Belgium, the Netherlands and Luxembourg partially nationalized Dutch-Belgian banking giant Fortis NV with a $16.4 billion rescue after investor confidence in the bank evaporated last week.

The news from Europe "made the market aware that the contagion was not just in the U.S.," said Amo Sahota, chief currency analyst at U.K.-based HiFX plc.

But the currency market's focus shifted to the United States later Monday after the government's proposed $700 billion intervention in the financial system fell short of the needed votes in the House.

"Now all eyes are back on the U.S.," Sahota said

Treasury prices soared Monday after a $700 billion economic rescue bill failed to pass in the House of Representatives, sending stocks into a tailspin.

Jitters about the depth of the credit crisis and whether the government would come to the rescue pushed investors toward the perceived safety of Treasurys, sending bond prices sharply higher.

Meanwhile, banks have the tap screwed down tightly on lending, keeping credit in a choke-hold.

Bailout: The House defeated the rescue bill Monday afternoon, following four hours of heated debate. The next steps were not immediately clear, but supporters were scrambling to put it up for another vote.

The proposed bailout plan would have pumped $700 billion into the economy in stages, with $250 billion available immediately. Lawmakers' goal was to jump-start the credit pipelines, facilitating lending between banks and to consumers.

But some market watchers wondered whether the plan was enough to fix the fundamental problems with the economy. "This bailout package is addressing the symptoms of the marketplace," said Andrew Brenner, senior vice president at MF Global. "It is not addressing the root," - the drop off in housing prices. As home values have plummeted, financial institution that were built on mortgages have buckled.

Before the U.S. markets opened, U.S. regulators said Citigroup (C, Fortune 500) will acquire the banking operations of Wachovia (WB, Fortune 500), the nation's fourth-largest bank. As part of the deal, Citigroup will acquire Wachovia's massive deposit network, as well as over $300 billion worth of Wachovia's loan portfolio and the company's debt.

Treasurys: Treasury prices soared Monday as investors looked for a safe-haven for their assets. After lawmakers rejected the bailout bill, investors pushed prices on the notes higher.

"We have a flight to safety from the stock market to the bond market," said Michael Cheah, senior portfolio manager at AIG SunAmerica. The Dow industrials were down more than 500 points, having plummeted more than 700 points earlier in the session.

The benchmark 10-year note rose 2 6/32 to 103 10/32, while its yield dipped to 3.59% from 3.85% late Friday. Bond prices and yields move in opposite directions.

The price on the 30-year bond jumped 4 1/32 to 106 2/32, and its yield fell to 4.14% from 4.36%.

The price on the 2-year note rose 29/32 to 100 22/32, while the yield fell to 1.63% from 2.12%.

The yield on the 3-month note fell to 0.39% from 0.85% Friday as prices on the short-term notes jumped. Yields on 3-month Treasurys have remained at very low levels as demand for the notes has increased amid the uncertainty in the financial markets.

The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

In order to pay for a costly rescue plan, the government would need to sell a lot more debt. Last week, the Treasury Department auctioned $34 billion in 2-year notes - the largest government debt auction in history - and $24 billion worth of 5-year notes. Both auctions attracted far more investor bids than there was debt made available.

Banks not sharing: Skittish investors have been holding onto their cash or hiding their assets in Treasurys, and nervous banks have been unwilling to lend money to other banks or to individuals.

"The other problem is that banks are not willing to lend money," said Cheah.

When banks don't loan money to each other readily, businesses and consumers see higher prices on loans, including mortgages and cars, and some can't get a loan at all. "Nobody going to lend anybody any money," said Cheah.

If banks do decide to lend, the borrower, be it a bank or consumer, will be slapped with a high premium.

For example, the Federal Reserve's key interest rate for banks lending to each other is at 2% but banks have been charging other banks nearly 4% to borrow money, said Cheah. Those high rates trickle down to customers, both individuals and companies.

Many companies will be able to draw on their lines of credit in the short term, said Cheah, but when that capital dries up, companies may find borrowing to be a challenge if the credit pipelines remain frozen.

Market gauges: Two market indicators of the price of borrowing showed a surge in the price of lending as banks seize up.

One market indicator that banks use to determine lending rates rose to an all-time high. The difference between the London interbank offered rate, or Libor, and the Overnight Index Swaps rose to a new record high of 2.20%, according to data reported by Bloomberg.com. The Libor-OIS "spread" measures how much cash is available for lending between banks. The bigger the spread, the less cash is available for lending.

In fact, the Libor rate on its own has been trending higher for some time as the European economy has stalled. The rate has stayed above 3% consistently during the past month - a level not seen since the start of this year. "The problems in Europe are much worse than they are in the U.S.," said Brenner.

And Europe is behind the U.S. in crafting its own rescue plan, which means a turnaround is likely still a ways off, according to Brenner. "The international marketplace has recognized that the U.S. is way ahead in terms of addressing the problems," said Brenner. "Over the weekend, you had 5 credit events in Europe where they had to step in and defend 5 different" financial institutions.

Dutch-Belgian bank and insurance giant Fortis and British mortgage lender Bradford & Bingley were bailed out by governments, and Germany's Hypo Real Estate Holding AG secured a credit line from several other banks.

Further evidence of the squeeze, the "TED spread," showed high prices of loans between banks. The TED spread measures the difference between three-month Libor and the three-month Treasury borrowing rates. By midday Monday, it reached the widest margin since at least 1982, topping 3.44%, according to Bloomberg.com. However, the measure had retreated to 3.16% later in the day.

The retreat was partly due to the Federal Reserve's move to bolster its access to liquid funds, which relieved some pressure, said Brenner.

Oil prices fell to near $103 a barrel Monday on concern that economic growth will slow across the globe despite a tentative agreement in Washington on a $700 billion bailout package to stabilize the U.S. financial system.

By midday in Europe, light, sweet crude for November delivery was down $3.50 to $103.39 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.13 Friday to settle at $106.89.

In London, November Brent crude fell $3.39 to $100.15 a barrel on the ICE Futures exchange.

Bailout plan goes to House
Congressional leaders and the White House agreed Sunday to a rescue of the ailing financial industry after lawmakers insisted on sharing spending controls with the Bush administration. The biggest U.S. bailout in history won the tentative support of both presidential candidates and goes to the House of Representatives for a vote Monday.

"The bailout package reduces the chance of a complete meltdown," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "But worries on the demand side will continue to weigh on oil prices."

The plan would give the administration broad power to use hundreds of billions of taxpayer dollars to purchase devalued mortgage-related assets held by cash-starved financial firms.

Congress insisted on a stronger hand in controlling the money than the White House had wanted. The government would take over huge amounts of devalued assets from beleaguered financial companies in hopes of unlocking frozen credit.

"It's still a crisis situation," Shum said. "The market is concerned about the depth and breadth of this global downturn."

JBC Energy in Vienna, Austria, also was cautious about the effects the rescue package could have on U.S. economic growth.

"The latest government reports show sales of new homes at a 17-year low in August and orders for durable goods falling stronger than expected," JBC said in a research note. "It is far from certain that (the bailout) will prevent an economic downturn."

Dollar stronger
Prices were also pushed down by a stronger dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell when the dollar strengthens.

While the dollar gained as details of the bailout package become known, analysts said the euro was weaker also because of growing economic problems in Europe.

"It is also a question of the euro losing ground due to a continued deterioration in the euro zone," said Olivier Jakob of Petromatrix in Switzerland. "With the rate of bank failures increasing in Europe and the economy slowing more rapidly than expected, pressure will continue to mount on the (European Central Bank) to lower (interest) rates."

The 15-nation euro fell Monday to $1.4361 from $1.4614 on Friday while the dollar rose to 106.23 yen from 106.01.

"The bailout should inject confidence in the markets in the short-term," Shum said. "Longer term, it increases money supply, inflation and likely weakens the dollar - all of which supports oil prices."

General Motors Corp. said Thursday it will build a new factory in Flint to make four-cylinder engines for the Chevrolet Volt rechargeable electric car and other models.

GM Chairman and Chief Executive Rick Wagoner said the new plant will build a 1.4-liter four-cylinder engine that will extend the range of the Volt, and a turbocharged version that will power the Chevrolet Cruze, a new compact car to be built in Lordstown, Ohio.

"This will be one of the places. You will be one of the teams that help GM lead into our second century," Wagoner told workers and government officials gathered for the announcement.

Production at the new $370 million plant will begin in 2010, and both cars are slated to go on sale in the same year.

Workers at the nearby Flint Engine North plant, which GM (GM, Fortune 500) is in the process of closing, said the announcement is good news for an area hard hit by auto job losses.

Although GM said the new plant won't create any new jobs, it will retain about 300 hourly positions, and workers said they are hopeful the new plant will create more employment in the industrial city about 50 miles northwest of Detroit.

"This also means that there's a future for our youth in this area," worker Jean Adams-Anderson said.

The state of Michigan on Tuesday approved $132.5 million in tax incentives for the automaker to spend $838 million on the new plant and to upgrade four other facilities, including the Detroit-Hamtramck assembly plant where the Volt will be built.

The Flint investment includes the 552,000-square-foot plant as well as machinery and other equipment. GM says it will invest another $21 million in tooling for its suppliers to support the new Flint factory.

The new plant will double its global production of GM's small four-cylinder engines by 2011, with more than half the increase going into North America.

The factory, GM said, will have 300 flexible work stations that will allow the company to build different four-cylinder engines without retooling.

GM's U.S. sales are down 18% so far this year due to a declining market and high gasoline prices that have caused a dramatic shift away from trucks and sport utility vehicles to smaller, more efficient cars.

The new plant will help GM roll out new models designed to adjust to the shift, which GM and other automakers say is permanent.

The struggling automaker has lost $57.5 billion in the past 18 months, including $15.5 billion in the second quarter. Its U.S. market share has fallen to about 23% this year from a peak of nearly 51% in 1962.

The company is banking on the much-ballyhooed Volt to be its car of the future, although it conceded this week that the Volt won't operate exactly as advertised.

GM initially said the Volt would be able to run 40 miles on its lithium-ion batteries, with a small internal combustion engine recharging the batteries to extend the range hundreds of miles. A top executive said the same thing as recently as last week.

But company spokesman Rob Peterson said Wednesday that engineers changed the design so the Volt engine will power a generator that would run the electric motor after the batteries are depleted. A small amount of power from the generator will recharge the batteries, but most will be used to directly run the car, he said.

He said bypassing the batteries is more efficient, and GM did not intend to deceive people by maintaining that he motor would only be used to recharge the batteries.

"At the end of the day, to the consumer, the vehicle will operate much the same way," he said.

General Motors Corp. said Thursday it will build a new factory in Flint to make four-cylinder engines for the Chevrolet Volt rechargeable electric car and other models.

GM Chairman and Chief Executive Rick Wagoner said the new plant will build a 1.4-liter four-cylinder engine that will extend the range of the Volt, and a turbocharged version that will power the Chevrolet Cruze, a new compact car to be built in Lordstown, Ohio.

"This will be one of the places. You will be one of the teams that help GM lead into our second century," Wagoner told workers and government officials gathered for the announcement.

Production at the new $370 million plant will begin in 2010, and both cars are slated to go on sale in the same year.

Workers at the nearby Flint Engine North plant, which GM (GM, Fortune 500) is in the process of closing, said the announcement is good news for an area hard hit by auto job losses.

Although GM said the new plant won't create any new jobs, it will retain about 300 hourly positions, and workers said they are hopeful the new plant will create more employment in the industrial city about 50 miles northwest of Detroit.

"This also means that there's a future for our youth in this area," worker Jean Adams-Anderson said.

The state of Michigan on Tuesday approved $132.5 million in tax incentives for the automaker to spend $838 million on the new plant and to upgrade four other facilities, including the Detroit-Hamtramck assembly plant where the Volt will be built.

The Flint investment includes the 552,000-square-foot plant as well as machinery and other equipment. GM says it will invest another $21 million in tooling for its suppliers to support the new Flint factory.

The new plant will double its global production of GM's small four-cylinder engines by 2011, with more than half the increase going into North America.

The factory, GM said, will have 300 flexible work stations that will allow the company to build different four-cylinder engines without retooling.

GM's U.S. sales are down 18% so far this year due to a declining market and high gasoline prices that have caused a dramatic shift away from trucks and sport utility vehicles to smaller, more efficient cars.

The new plant will help GM roll out new models designed to adjust to the shift, which GM and other automakers say is permanent.

The struggling automaker has lost $57.5 billion in the past 18 months, including $15.5 billion in the second quarter. Its U.S. market share has fallen to about 23% this year from a peak of nearly 51% in 1962.

The company is banking on the much-ballyhooed Volt to be its car of the future, although it conceded this week that the Volt won't operate exactly as advertised.

GM initially said the Volt would be able to run 40 miles on its lithium-ion batteries, with a small internal combustion engine recharging the batteries to extend the range hundreds of miles. A top executive said the same thing as recently as last week.

But company spokesman Rob Peterson said Wednesday that engineers changed the design so the Volt engine will power a generator that would run the electric motor after the batteries are depleted. A small amount of power from the generator will recharge the batteries, but most will be used to directly run the car, he said.

He said bypassing the batteries is more efficient, and GM did not intend to deceive people by maintaining that he motor would only be used to recharge the batteries.

"At the end of the day, to the consumer, the vehicle will operate much the same way," he said.

Faced with a dismal climate for consumer spending, Richard Baker, a real estate mogul turned boy wonder of retailing, has set in motion a dramatic shakeup of his crown jewel, the Lord & Taylor department store chain.

Baker is replacing L&T's CEO Jane Elfers with Brendan Hoffman, a longtime Neiman Marcus executive. The management shake up is part of an ambitious plan to combine L&T's back office operations with those of two other retailers that Baker owns through his investment firm NRDC Equity Partners.

With forecasts calling for one of the worst holiday shopping seasons in nearly two decades and the credit markets in crisis, retailers are scrambling to rethink their strategies and conserve cash.

L&T has spent millions over the last few years to remodel stores and add trendier fashions in an effort to attract higher-end customers. Although the company has made some progress, L&T - like other retailers - is coming up against economic headwinds that will make managing expenses a greater priority going forward.

Baker, who was the subject of a Fortune Magazine profile in April, got his start building shopping centers anchored by Wal-Marts along the East Coast. He made the jump from real estate mogul to retail operator in June 2006, when his investment firm paid $1.2 billion - all but $100 million of it borrowed money - to buy Lord & Taylor from what was then called Federated Department Stores (now Macy's).

His shopping spree didn't end there. In February, Baker spent $100 million to acquire Fortunoff, a down at the heels furniture and jewelry chain, out of bankruptcy. He then launched Creative Design Studios, which makes apparel for Lord & Taylor and other stores. And in July, he bought Hudson's Bay, the large Canadian department store chain. Although an acquisition price was not disclosed, Baker said at the time of the deal that he planned to invest $500 million in a holding company, called Hudson's Bay Trading Company that would have oversight of all his retail operating companies.

The plan under discussion calls for back office functions such as computing and accounting to be combined at L&T, Hudson's Bay and Fortunoff -- potentially saving millions of dollars a year. "The executive reorganization enables the Hudson Bay Trading Company and its subsidiaries to generate sizeable economies of scale through improved purchasing, shared services and more efficient utilization of information technology including Internet retailing," according to the company's press release.

But making any changes heading into the all-important fourth quarter carry huge risks. Retailers typically save management shuffles until January, after the busy holiday shopping season when any disruption can magnify the possibility of operating snafus.

In choosing Hoffman to run L&T, Baker is betting on a well-regarded executive, but one who does not have recent experience running bricks-'n-mortar stores. Hoffman, who got his start in the L&T training program, has spent the last six years running the catalog and online operations for Neiman Marcus.

Elfers served as L&T's CEO since 2000, and is largely the architect of its turnaround strategy. According to Baker, her contract had expired. Elfers was not immediately available for comment.

Newspaper publisher McClatchy Co. has restructured its agreement with lenders in response to declines in advertising revenue.

McClatchy said Friday the amendment to its $1.175 billion credit facility will give it greater flexibility in two key areas - allowable leverage and interest coverage ratios.

In return, McClatchy says it is offering banks new security in collateral and higher pricing.

Pat Talamantes, the company's chief financial officer, says advertising revenue is being hurt by an economic downturn nationwide and the outlook for 2009 makes the new agreement necessary.

Last week, the company slashed 1,150 jobs because of the advertising woes, its second major round of reductions in three months

Delta Air Lines Inc. said Friday it would offer first and economy class aboard its shuttle flights beginning Dec. 1.

Delta spokeswoman Betsy Talton said prices will vary by route, but first-class seats will generally cost $100 to $250 more than economy.

Delta said it would offer 14 seats in first class and 128 in economy after reconfiguring its MD-88 jets used in shuttle service.

Open-seating - without assigned seats - will remain in each class, the Atlanta-based airline said.

Delta said elite "Medallion" members of its SkyMiles frequent-flier program would be eligible for free upgrades to first class.

To promote the service, Delta said new and current SkyMiles members can earn double miles on shuttle flights on or before Dec. 15 between New York's LaGuardia Airport and Boston or Washington.

The airline said it is keeping perks such as free beer, wine, snacks and newspapers on the shuttle service and would expand selections in first class, where the seats will be wider and cocktails will be complimentary.

By next spring, Delta said, the entire shuttle fleet of nine planes will be equipped with high-speed Internet access and texting services through vendor Aircell's Gogo system for $9.95 per flight.

Lee Macenczak, Delta's executive vice president of sales and marketing, said dividing shuttle flights into two classes would give customers more options.

Delta said customers may see two-class service on some shuttle planes in November as the company completes the reconfiguration of its planes.

Delta (DAL, Fortune 500) shares fell 10 cents to $7.96 in afternoon trading.