Investors' worries drive down stocks

NEW YORK » Investors concerned about inflation after a surprise jump in labor costs sent stocks skidding lower yesterday, with unfounded rumors of a terror threat compounding the selling. The decline came despite a drop in oil prices and positive employment news.

Wall Street worried that the Labor Department's productivity data, which showed a 2.4 percent jump in unit labor costs, was a harbinger of inflation, since that meant companies were paying more for less productive workers. With the Federal Reserve clearly willing to keep raising interest rates to fight inflation, investors worried about the potential economic damage of such a rate hike.

Stocks took a sharp dive early in the session after several floor traders said a rumor circulated that the Homeland Security Department was going to announce a new terror threat. Although the rumor proved false, the major indexes had already fallen too much to mount a rally, as concerns about Iran's nuclear program and instability in the Middle East grew.

"I think the market here is in a very nervous state," said Peter Cardillo, chief strategist and senior vice president at S.W. Bach & Co. "You have geopolitical problems surrounding the Iranian situation heating up, and you have concerns about productivity, and that's keeping investors very cautious."

The Dow fell 101.97, or 0.93 percent, to 10,851.98.

Broader stock indicators also fell sharply. The Standard & Poor's 500 index slid 11.62, or 0.91 percent, to 1,270.84, and the Nasdaq composite index dropped 28.99, or 1.25 percent, to 2,281.57.

Riskier small-cap stocks bore the brunt of the selling, along with the technology sector and automotive stocks. Biotech stocks fell 1.4 percent, while computer hardware shares dropped 1.2 percent and auto parts lost 1.1 percent. The Russell 2000 index of smaller companies fell 9.23, or 1.3 percent, to 726.25.

Bonds were little changed, with the yield on the 10-year Treasury note steady at 4.56 percent from late Wednesday. The yield on the two-year note, however, moved up to 4.57 percent, causing the latest inversion of the Treasury yield curve. When short-term bonds yield more than long-term, investors take that as a sign of a lack of short-term confidence and an omen of future economic disruption.

The U.S. dollar was mixed against other major currencies, while gold prices rose.

Despite the concerns over Iran, oil prices fell as world leaders sought to minimize the chance of substantial conflict there. A barrel of light crude settled at $64.68, down $1.88, on the New York Mercantile Exchange.