Stocks tumbled after the government said retail sales rose more than expected in November, indicating that consumers are spending freely despite higher interest rates. The Nasdaq composite index suffered its worst loss since late September.
The Dow Jones industrial average dropped 32.42 to close at 11,160.17.
The Nasdaq composite, which had set 23 new closing highs since Oct. 29, lost 2.4 percent of its value, dropping 86.51 to close at 3571.66. The Standard & Poor's 500 fell 12.05, to 1403.17.
Stocks declined after the Commerce Department said retail sales rose 0.9 percent in November, the largest gain in three months, as merchants headed into the busy holiday shopping season.
That report suggested to some investors that the Federal Reserve may not be finished raising interest rates. The central bank has raised short-term rates three times in 1999 in an effort to cool the economy and prevent inflation from escalating too sharply.
After the Fed last raised rates on Nov. 16, central bankers adopted a "neutral bias," indicating they were not inclined to raise rates again for a while. Stocks raced higher as investors celebrated the Fed's apparent determination that inflation was under wraps.
The decline after today's report betrayed some lingering nervousness, analysts said.
"The Fed will have to increase rates to rein in the economy," said Richard L. Babson, president and chairman of the investment advisory firm Babson-United Inc. Like many analysts, he believes the Fed will leave rates unchanged at its next meeting on Dec. 21, due largely to concerns about year 2000 computer conversions.
But Babson believes the Fed may raise rates as early as February. "Growth is pushing the border of what's acceptable," he said.
Investors focused on the retail sales figure to the exclusion of a report of modest consumer inflation. The Labor Department said its consumer price index, the most closely watched inflation gauge, rose just 0.1 percent in November, its most modest showing in five months.
The yield on the 30-year Treasury bond, which moves in the opposite direction of the price, shot up to 6.30 percent, from 6.20 percent late Monday, as the bond's price fell $13.43 3/4 per $1,000 in face value. The uncertain interest-rate outlook pressured financial stocks such as American Express and J.P. Morgan.
As of 5:45 p.m., American Express had fallen 5-13/16, to 160 1/2, and J.P. Morgan had lost 3-5/16, to 131 1/4.
Bonds and financial stocks typically falter when interest rates are rising. Higher rates cut into the value of existing holdings. For banks and brokerages, higher rates can cut into lending volume as it becomes more expensive to borrow money.
Technology stocks, which dominate the Nasdaq, fell steeply as investors collected profits from a recent run to record levels.
Today, Yahoo fell 17-15/16, to 333 1/8. Sun Microsystems fell 4 7/8, to 75-9/16, and Amazon.com lost 6 7/8, to 95 5/8.
Microsoft provided a temporary respite from the technology sell-off, rising as high as 101 1/8 as traders weighed a rumor that the software company is close to a settlement with the government that could put an end to its antitrust woes.
Microsoft analysts and Justice Department officials ultimately discounted speculation about a deal, puncturing the brief rally. Microsoft clung to a gain of 2-1/16 and closed at 98-11/16.
In after-hours trading, Bloomberg News reported, Oracle surged after reporting quarterly earnings that beat even the most optimistic forecasts. Oracle jumped 7-1/16, to 84, in after-hours trading.