updated 5/19/2006 9:17:33 AM ET 2006-05-19T13:17:33

Wall Street extended its losses Thursday, a day after an inflation scare sent the Dow Jones industrial average on its biggest one-day drop in three years and put the Nasdaq composite index in the red for 2006.

Major Market Indices

Stocks drifted in a narrow range through most of the session but took a sharp turn lower in the last hour of trading, when a market already nervous about interest rates was unsettled by comments from Federal Reserve Bank of St. Louis President William Poole. Poole, who is not a voting member of the Fed’s policy-making Federal Open Market Committee, reiterated the central bank’s assessment that future rate hikes will depend on how the economy fares.

Concerns that rising inflation would send rates higher propelled the stock market sharply lower Wednesday, carrying the Dow’s 214-point dive points in the process.

Even before Poole’s comments were reported on news services, investors were clearly not in a mood to buy. Data that showed a moderating economy had little impact on trading, including an unexpected drop in the Conference Board’s index of leading indicators and an upswing in jobless claims. Meanwhile, a fresh rise in oil prices fed inflation fears and overshadowed the bond market’s rebound and a stabilizing U.S. dollar after its recent tumble.

“This market is just scared right now,” said Ryan Larson, an equity trader at Voyageur Asset Management. “People are taking money off the table and no bets are being made because no one knows what to do right now.”

According to preliminary calculations, the Dow dropped 77.32, or 0.69 percent, to 11,128.29. On Wednesday, the Dow had its worst session since sinking 307 points on March 24, 2003.

Broader stock indicators also declined. The Standard & Poor’s 500 index lost 8.51, or 0.67 percent, to 1,261.81, and the Nasdaq sank 15.48, or 0.7 percent, to 2,180.32.

Although Thursday’s mild economic data did little for stocks, it brightened the bond market’s outlook for interest rates. The yield on the 10-year Treasury note plunged to 5.06 percent from 5.16 percent late Wednesday.

Elsewhere, the U.S. dollar was little changed against other major currencies, and gold prices retreated to $680 an ounce.

The catalyst for the previous day’s frenzied selling was a stronger-than-forecast jump in consumer prices that ignited concerns that the Fed might keep boosting interest rates amid signs that record energy costs are beginning to seep into other parts of the economy.

Nervousness that inflation and higher interest rates will choke U.S. consumer spending also weighed on stock markets in Asia. Japan’s Nikkei stock average dropped 1.35 percent, its seventh losing day in the last eight sessions.

Some analysts say higher interest rates are inevitable given the strength of the global economy, and the market’s recent retreat was indicative of investors’ overblown expectations that the Fed was nearly done with its rate tightening. The uncertainty now lies in whether the Fed will sacrifice economic growth to impede escalating prices, or spare inflation to aid the economy’s expansion.

“I think investors are trying to figure out how much damage the Fed may need to do to growth for inflation pressures to be arrested,” said Stuart Schweitzer, global markets strategist for JPMorgan Asset and Wealth Management. “It’s possible that the Fed has already done enough, but it’s looking increasingly unlikely.”

Voyageur’s Larson added that while crude oil is off its all-time high of $75 a barrel, traders could soon grow fearful about the upcoming hurricane season after last year’s storms battered Gulf Coast refineries. Oil futures reversed course after two days of selling, with a barrel of light crude adding 76 cents to $69.45 on the New York Mercantile Exchange.

The Conference Board said its index of leading indicators fell 0.1 percent for April, below predictions for a 0.1 percent gain. However, the prior month’s reading was revised to a 0.4 percent increase from a previous 0.1 percent decline.

Elsewhere, the Labor Department attributed a spike in applications for jobless benefits to the government shutdown in Puerto Rico. First-time unemployment claims added 42,000 to 367,000 last week, versus estimates for a 7,000 decrease.

Sears Holding Corp. said it swung to a profit on improved results at its Kmart and Sears department stores. Sears surged $20.65 to $158.61.

Burger King Holdings Inc. rose in its trading debut after pricing its initial public offering at $17 a share, the high end of the No. 2 hamburger chain’s expected range. Burger King added $1.19 to $18.19.

Declining issues overtook advancers late in the day and were ahead by 5 to 3 on the New York Stock Exchange, where volume of 1.77 billion shares lagged the 2.1 billion shares that changed hands Wednesday.

The Russell 2000 index of smaller companies dropped 7.38, or 1.02 percent, to 718.47, after spending most of the day in positive territory.

Overseas, Britain’s FTSE 100 fell 0.07 percent, Germany’s DAX index added 0.24 percent and France’s CAC-40 was lower by 0.24 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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