NEW YORK (Reuters) - Dow Jones & Co. on Thursday replaced three of America's oldest companies in its benchmark Dow Jones industrial average in a move that reflects the growing importance of the financial and health care sectors to the U.S. economy.

AT&T Corp. , Eastman Kodak Co. and International Paper Co. will be dropped from the blue-chip Dow index in favor of insurer American International Group Inc., drugmaker Pfizer Inc., and phone company Verizon Communications, Dow Jones said.

The changes help make the blue-chip Dow Jones industrial average -- the world's best known market gauge -- more closely mirror the U.S. economy's waning reliance on the factory sector.

"It probably says something, if you look at the components of the Dow, about the overall composition of the U.S. economy," said Deutsche bank analyst Mark Wilde. "If you look at the long term, manufacturing is a smaller and smaller piece."

Shares of the new additions to the index got a boost. Verizon shares ended up 1 percent to $36.90, Pfizer gained 1.5 percent to $35.57 and AIG rose 2.8 percent to $73.32. The outgoing stocks, however, all sagged. AT&T fell 1.4 percent to $19.30, Kodak shares dropped 4.1 percent to $25.10 and International Paper slipped 0.2 percent to $42.18.

The Dow, made up of 30 bellwether companies, fell modestly in the first quarter of this year, a decline that followed a 25 percent gain in 2003.

"Changes have been made before and are an attempt to stay in touch with the times," said Jack Schannep, editor of TheDowTheory.com based in Tucson, Arizona. "In the longer run, you'd think the Dow will rise to levels it would not have seen with the older, stodgier stocks."

CHANGING TIMES

The changes, effective at the open of trading on April 8, are the first shifts in the 107-year-old stock index since 1999, when four of the Dow stocks were replaced. The composition of the Dow index is decided by the editors of The Wall Street Journal, published by Dow Jones & Co.

The most recent shift was made to "recognize trends within the U.S. stock market, including the continued growth of the financial and health care sectors and the diminishing relative weight of basic materials stocks," Paul Steiger, managing editor of The Wall Street Journal, said in a news release.

More than $20 billion in assets are directly tied to the index through various licensed products such as exchange-traded funds like Diamonds Trust and Dow futures options, said Dow spokeswoman Sybille Reitz.

The Dow, unlike most other stock gauges, including the widely tracked Standard & Poor's 500 index , is not weighted for market capitalization, so stocks with higher prices have a greater impact than lower priced stocks.

AIG is the world's largest insurance group by market value, as well as the leading insurer of U.S. companies.

Verizon, the largest U.S. telephone company, was among the seven companies carved out of AT&T in an antitrust ruling in 1984. Its addition to the Dow marks the third time a company has taken the place of its broken-apart parent to represent its industry in the index.

Pfizer, whose big acquisitions have helped make it the world's largest drugmaker, joins drug heavyweights Merck & Co. and Johnson & Johnson.

"It's really a reflection of trends that have been in place for a while," said John Prestbo, editor of the Dow Jones Indexes. "The Dow's composition was getting a little bit out of step with the composition of the market and the economy."

Kodak, which joined the Dow on July 18, 1930, has been going through a tough transition as it moves away from film and toward digital imaging. AT&T was in the Dow from 1916 to 1928, and then re-entered the index in 1939. International Paper has been a member since 1956.

Charles Henry Dow, who co-founded Dow Jones & Co., created the index on May 26, 1896 with 12 companies. The Dow grew to 30 stocks in 1928, and has held that number ever since. (Additional reporting by Caroline Humer, Justin Hyde, Greg Cresci, Mike Erman, Jed Seltzer, Nick Olivari, Herb Lash and Jonathan Stempel)

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