updated 2/3/2006 9:07:44 AM ET 2006-02-03T14:07:44

A surprise jump in labor costs and ongoing concerns about the Middle East triggered a triple-digit slide on Wall Street Thursday, with Dow Jones industrial average finishing the day down 102 points.

Major Market Indices

Investors worried that the Labor Department’s productivity data, which showed a 2.4 percent jump in unit labor costs, was a harbinger of inflation, since that meant companies were paying more for less productive workers. With the Federal Reserve clearly willing to keep raising interest rates to fight inflation, Wall Street worried about the potential economic damage of such a rate hike.

In addition, concerns about Iran’s nuclear program loomed over the markets despite a drop in oil prices. Compounding the problem, traders reported a rumor was circulating early in the session that the Homeland Security Department was going to announce a new terror threat. Although the rumor proved false, the major indexes turned sharply lower.

“I think the market here is in a very nervous state,” said Peter Cardillo, chief strategist and senior vice president at S.W. Bach & Co. “You have geopolitical programs surrounding the Iranian situation heating up, and you have concerns about productivity, and that’s keeping investors very cautious.”

The Dow Jones industrial average finished the day down 101.97 points, or 0.93 percent, while the broader Standard & Poor’s 500-stock index declined 11.62 points, or 0.91 percent. The Nasdaq composite index gave up 28.99 points, or 1.25 percent, as small-cap and technology stocks saw heavy selling pressure.

Bonds were little changed, with the yield on the 10-year Treasury note steady at 4.56 percent from late Wednesday. The yield on the two-year note, however, moved up to 4.57 percent, causing the latest inversion of the Treasury yield curve. When short-term bonds yield more than long-term, investors take that as a sign of a lack of short-term confidence and an omen of future economic disruption.

Despite the concerns over Iran, crude oil prices fell as world leaders sought to minimize the chance of substantial conflict there.

A drop in initial jobless claims failed to spark much enthusiasm. The number of first-time jobless claims dropped by 11,000 last week to 273,000. The four-week moving average of claims fell to its lowest level in 5½ years, the Labor Department said. With the Labor Department’s monthly jobs report due Friday, however, investors were more inclined to remain cautious than to celebrate the news.

Retail stocks fell despite strong sales reports for January , as investors cashed in gains after bidding them higher earlier in the week in anticipation of good news. Wal-Mart Stores Inc. led the raft of retail sales announcements with a 4.7 percent increase in same-store sales, or sales in stores open at least a year, for its best performance since May 2004. Analysts had expected 4.4 percent sales growth. Wal-Mart rose 14 cents to $46.28.

Rival Target Corp. rose 49 cents to $55.23 after it too beat Wall Street’s sales forecasts. Department store chains Nordstrom Inc., which added 13 cents to $42.13, and J.C. Penney Co. Inc., which rose 9 cents to $56.06, also exceeded expectations.

In earnings news, Tyco International Ltd. fell $1.30 to $24.80 after its quarterly profits fell 22 percent , due in part to one-time charges related to discontinued operations.

Overseas, Japan’s Nikkei stock average surged 1.4 percent. European stocks mirrored Wall Street’s sharp decline. Britain’s FTSE 100 closed down 0.94 percent, France’s CAC-40 lost 1.43 percent and Germany’s DAX index fell 1.34 percent.

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