The Dow lost 160.48 points, or about 2.3 percent, to close at 6,878.89, led by a steep selloff in Philip Morris Cos. Inc., which plunged the equivalent of about 35 Dow points amid tobacco litigation worries.
Stocks were pressured from the open by the bond market, where interest rates jumped amid news of surprisingly heavy retail activity in January and February.
As bond prices fell today, the yield on the 30-year Treasury bond -- a key determinant of borrowing costs -- rose as high as 6.98 percent, up from late yesterday's 6.88 percent. The long-bond yield hasn't been above 7 percent since September.
The robust retail sales report compounded growing fears that the Federal Reserve will soon raise interest rates to slow borrowing and spending as protection against inflationary demand. A sharp rise in retail sales, which represent about one-third of the nation's economic activity, might aggravate inflationary pressures such as rising production costs.
Prominent among the NYSE's most active issues were those involved in the planned reconfiguration of the Dow, announced after yesterday's close by Dow Jones & Co., publisher of the Wall Street Journal.
Starting Monday, the 30-company blue-chip average will include Wal-Mart Stores, Travelers Group, Hewlett-Packard, and Johnson & Johnson. They will replace Westinghouse Electric, Texaco, Bethlehem Steel, and Woolworth.
The Commerce Department reported this morning that retail sales rose 0.8 percent in February, which was slightly higher than expected.
Last month's initial estimate of January's increase, meanwhile, was revised sharply from 0.6 percent to 1.5 percent.
On the New York Stock Exchange, decliners led advancers today by a 4-to-1 margin, with 535 up, 2,099 down and 715 unchanged. NYSE volume totaled 503.74 million shares vs. 483.22 million yesterday.
The Standard & Poor's 500-stock list fell 14.70, or 1.8 percent, to 789.56; the NYSE composite index fell 7.67 to 415.87, and the American Stock Exchange index fell 4.02 to 598.02.
The Nasdaq composite index fell just 10.86 to 1,293.27, cushioned by a partial rebound in some technology issues beaten down by recent profit-taking.