The fear of higher interest rates returned to Wall Street after a three-session hiatus, sending blue-chip stocks and bond prices sharply lower.
The Dow Jones industrial average fell 143.74 to close at 10,765.64, more than wiping out Monday's solid gains.
Broader stock indicators also ended lower. The Standard & Poor's 500 dropped 17.19, to 1317.33, and the technology-dominated Nasdaq composite index fell 49.71, to 2474.50.
Major market averages rallied in recent days as new economic data suggested that the nation's unprecedented growth may be continuing without rising inflation. Analysts said many investors had abandoned their certainty that the Federal Reserve would raise interest rates to stifle inflation when its Open Market Committee meets June 29.
But today, William Poole, president of the Federal Reserve Bank of St. Louis, suggested that he believed inflation has returned to the economy. Bond prices tumbled after his remarks, pushing the yield on the 30-year Treasury bond to 6 percent. The yield was barely lower, at 5.99 percent, up from 5.96 percent Monday. The price of the benchmark bond fell $3.75 per $1,000 invested.
"The bond market can't get out of its own way," said Charles Pradilla, chief investment strategist at SG Cowen Securities, noting that at that level, bonds are perceived as a favorable alternative to stocks.
Investors turned away from a wide range of stocks, although consumer products and chemical companies led the Dow industrials lower. Procter & Gamble fell 2 3/4, to 94-13/16, and DuPont dropped 3-5/16, to 69 1/2.
Major airline stocks fell after several carriers cut ticket prices by as much as 25 percent for off-peak summer travel. UAL, the parent of United Air Lines, has already said it expects to miss second-quarter earnings forecasts, and the fare sale struck investors as another potential threat to profits. UAL led the decliners, falling 2-9/16, to 63-13/16.
Shares of the nation's biggest computer makers, including IBM, down 3 7/8 at 116 5/8, were held back by several factors.
Compaq fell 15/16, to 22-15/16, after US Bancorp Piper Jaffray analyst Ashok Kumar said the computer maker could post an operating loss in the second quarter. Kumar said Compaq is losing market share to Hewlett-Packard.
Volume was light as traders looked ahead to Friday, when the government will report on producer prices. Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla., said traders will use that data to firm up their bets on whether the Fed will indeed raise rates.
"The figures tell a story of how wage pressures are being met, and whether we may be approaching a breaking point," he said.
Declining issues outnumbered advancing ones by 8 to 5 on the New York Stock Exchange, where volume totaled 686.0 million shares, up from 664.3 million on Monday.
The NYSE composite fell 6.17, to 630.77; the American Stock Exchange composite fell 5.23, to 772.92; and the Russell 2000 index of smaller companies fell 3.13, to 443.76.