Financial markets swooned last week in response to mounting evidence that the U.S. economy was decelerating at a faster pace than almost anyone had expected.

The first surprise came when the government reported that consumer spending in June fell at the sharpest pace since September 2001. A dramatic slowdown in mortgage refinancings and cash-outs was surely one factor, as was the absence of any increase in household incomes after adjustment for inflation and taxes. But perhaps the bigger impact came from the sharp run-up in oil prices that not only drove futures prices to new highs, but also began showing up dramatically at the gasoline pumps just as Americans were filling up for their summer vacations. And while automakers reported a nice surge in their sales for July, that came largely on the strength of new incentives designed to clear out dealer lots before the arrival of next season's models.

Then came Friday's report that employers added a paltry 32,000 jobs in July, coupled with downward revisions for reported gains in May and June. The average 100,000 gain over the three-month period is hardly enough to keep up with population growth, and it reflects continuing reluctance by businesses to hire permanent employees.

The data, along with continued warnings from the high-tech sector that orders were not meeting earlier expectations, prompted economists to downgrade their forecasts and sent investors into a defensive crouch.

On Wall Street, stocks had their worst week since last September, with the Dow Jones industrial average falling through 10,000 to close at 9815, down 3.2 percent for the week. The Nasdaq was down 5.9 percent.

As is often the case, bad news for stocks means good news for the bond market, where prices rose sharply, driving down yields. Interest rates on the 10-year Treasury bond fell more than a quarter of a percentage point while the dollar recorded its biggest daily decline against the euro since January.

All this will complicate the work of the Federal Reserve, which had been planning a slow but steady increase in short-term interest rates in anticipation of economic growth in the range of 4 percent. The Fed's policy committee is still expected to raise rates another quarter-point when it meets Tuesday, if for no other reason than to not spook the markets further. But the timing of additional increases is now more an open question as policymakers try to scope out the impact of higher energy prices and renewed terrorist threats.