updated 12/4/2006 8:56:54 AM ET 2006-12-04T13:56:54

Wall Street stumbled Friday after a key survey showed manufacturing unexpectedly contracted in November for the first time in more than three years, stoking concerns that the economy won’t be able to achieve a soft landing.

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Stocks and the dollar were socked after the Institute for Supply Management said its index on manufacturing fell to 49.5 from 51.2 in October. Economists had been expecting 51.5. Anything under 50 indicates the manufacturing sector is contracting.

The report, based on a survey of corporate purchasing managers, was seen by some on Wall Street as possibly indicating that the Federal Reserve might have overshot the mark in more than two years of interest rate hikes that ended in June. Wall Street had been expecting the Fed would hold interest rates steady at its Dec. 12 meeting, and now there is a growing belief the central bank may soon cut rates because of economic weakness.

“This is just additional confirmation that the economy is not only slowing but quite possibly going into a recession,” said Hugh Moore, a partner with investment firm Guerite Advisors. “It’s not just the housing and auto industry any longer, now we’re finding out that manufacturing in general is slowing.”

Moore said an ISM number below 50 has preceded every U.S. recession since the 1960s.

Leading the Big Board lower in volatile trading were shares of manufacturers like 3M Co., Caterpillar Inc., and United States Steel Corp. Thbe Dow Jones industrial average fell 27.80, or 0.23 percent, to 12,194.13.

Broader stock indicators also declined. The Standard & Poor’s 500 index dropped 3.92, or 0.28 percent, to 1,396.71, and the Nasdaq composite index fell 18.56, or 0.76 percent, to 2,413.21.

The drop does not bode well as Wall Street hopes to finish the final month of the year with double-digit growth. The Dow is up 13.78 percent so far this year, while the S&P 500 has gained 11.89 percent and the Nasdaq is up 9.43 percent.

The ISM news had a big effect on other markets. Bonds rose, with the yield on the benchmark 10-year Treasury note falling to an 11-month low of 4.43 percent from 4.46 percent late Thursday.

The dollar continued its slide against major currencies, except the yen. Also hitting the dollar was a Commerce Department report that U.S. construction spending took its biggest tumble in five years during October.

Friday’s news put attention on afternoon speeches by Chicago Fed President Michael Moskow, Richmond Fed President Jeffrey Lacker, and Fed Vice Chairman Donald Kohn, though the comments ultimately seemed to have little effect. Fed Chairman Ben Bernanke made no comment on the economic outlook during a speech Friday morning , although on Tuesday he said risks from inflation could further complicate an economy suffering from a general slowdown.

Moskow said inflation is moving in the right direction but that further interest rate hikes could be necessary. Lacker’s speech didn’t include comments on economic forecasts, according to prepared remarks.

The weak manufacturing snapshot comes after a report Thursday from Chicago-area corporate purchasing managers that indicated business activity in the Midwest slowed faster than anticipated. It also follows a bigger than expected drop in home sales for October.

Manufacturers were among the biggest decliners, touching sectors from chip makers to steel companies. Heavy equipment maker Caterpillar Inc. fell 84 cents to $61.19. Intel Corp. declined 47 cents, or 2.2 percent, to $20.93. U.S. Steel fell $1.79, or 2.4 percent, to $73. 3M fell $1.48 to $79.98.

Automakers were also in focus as they reported November car and truck sales . Ford fell 9 cents to $8.04 after it reported U.S. sales slipped 9.6 percent, while DaimlerChrysler AG dropped 29 cents to $57.99 after posting a 4.7 percent rise. Toyota Motor Corp.’s monthly sales surpassed Ford’s — the No.2 U.S. automaker — for only the second time ever.

General Motors Corp. rose 46 cents to $29.69 in heavy volume after a report that financier Kirk Kerkorian dumped his stake in the world’s largest automaker for more than $800 million. He had about 28 million shares left, which were sold off late Thursday, according to The Wall Street Journal. Investors seemed little moved by the company’s November auto sales report, which showed an increase of 5.8 percent.

Home Depot Inc. shares surged $1, or 2.6 percent, to $38.98 on speculation the home improvement chain might be an acquisition target by several private equity firms.

H&R Block Inc. declined after the nation’s largest tax preparer reported a wider-than-expected loss during the second quarter as its mortgage lending arm continues to lose money. H&R Block fell 25 cents to $23.75.

Warner Music Group Corp. fell 62 cents to $24.80 after the record company reported third-quarter results that fell short of Wall Street projections.

The Russell 2000 index of smaller companies fell 4.96, or 0.63 percent, to 781.17.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.71 billion shares, compared with 1.97 billion traded at the same point Thursday.

Overseas, Japan’s Nikkei stock average closed up 0.29 percent. Britain’s FTSE 100 closed down 0.45 percent, Germany’s DAX index ended down 1.08 percent, and France’s CAC-40 fell 1.38 percent.

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

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