The stock market fell for the first time in five days and Treasurys slipped after a jump in inflation stoked concerns that the Federal Reserve would be forced to raise interest rates.
Stocks extended their slide late Tuesday after General Electric Co. forecast that revenue and earnings would be largely flat in 2010.
Major stocks indexes slid 0.5 percent from 14-month highs, including the Dow Jones industrial average, which lost 49 points.
Trading was subdued as Fed policymakers gathered for a two-day meeting on interest rates. The Fed isn't expected to raise rates from their record low level, but the day's economic reports brought reminders that the central bank could be forced to raise rates sooner than expected to keep inflation at bay.
The government said wholesale prices jumped 1.8 percent last month, more than double the gain analysts expected. Core inflation, which excludes often-volatile food and energy costs, rose 0.5 percent, the biggest increase in more than a year.
Analysts said the increase in food and energy costs was likely a concern for Fed officials.
"They're the twin pistons of inflation," said Christopher Wolf, managing partner and co-chief investment officer at Cogo Wolf Asset Management LLC in San Francisco.
Meanwhile, the Fed said industrial production rose 0.8 percent in November, the biggest gain since August. The rise in production meant factories ran at a higher capacity. The portion of capacity being used remains below average, but if factories start seeing demand increase prices could rise.
The reports put inflation on investors' screens. If prices start rising and the Fed raises rates, it could choke off a nascent economic recovery. The Fed is expected to release a statement on the economy and interest rates Wednesday afternoon after its meeting.
"There is a fair chance that the Fed is going to have to start putting some brakes on the economy," Wolf said, adding that he doesn't expect any immediate actions from policymakers.
Higher rates would help shore up the dollar, which rose Tuesday, but has fallen against other major currencies since stocks began rising in March. It could also trip up the stock market as traders realign their holdings.
Stocks have slowed their nine-month advance in December as traders look to lock in gains for the year and seek clues about what might be able to drive the market in 2010. The benchmark Standard & Poor's 500 index has jumped 63.8 percent from a 12-year low in March on relief that the economy appears to be stabilizing. Analysts say investors will need substantive signs that the economy is improving to extend the gains next year.
The Dow fell 49.05, or 0.5 percent, to 10,452.00. The S&P 500 index fell 6.18, or 0.6 percent, to 1,107.93, and the Nasdaq composite index fell 11.05, or 0.5 percent, to 2,201.05.
The Dow and S&P 500 index closed Monday at their highest levels since October 2008 as concerns eased about global debt problems.
Bond prices fell, pushing yields higher. The yield on the benchmark 10-year Treasury note rose to 3.60 percent from 3.56 percent late Monday.
The dollar rose to its highest level in two months against the euro, while gold prices fell.
Crude oil rose $1.18 to settle at $70.69 per barrel on the New York Mercantile Exchange and break a nine-day slide.
Investors turned cautious after GE's forecast. CEO Jeffrey Immelt said the conglomerate is making a rebound after a difficult year and that it is looking to rely more on its energy and health care businesses and less on its financial arm for earnings in 2010. The stock fell 20 cents, or 1.3 percent, to $15.75.
Meanwhile, Best Buy Co. said its fourth-quarter profit margins will face pressure as shoppers look for less expensive items. The comments came as the electronics retailer said its third-quarter earnings more than quadrupled. Best Buy fell $3.84, or 8.5 percent, to $41.53.
Three stocks fell for every two that rose on the New York Stock Exchange, where volume came to 1.2 billion shares, compared with 1.1 billion Monday.
Britain's FTSE 100 fell 0.6 percent, Germany's DAX index rose 0.2 percent, and France's CAC-40 added 0.1 percent. Japan's Nikkei stock average fell 0.2 percent.