Dow losses mount on inflation fears

NEW YORK » Wall Street extended its losses yesterday, a day after an inflation scare sent the Dow Jones industrial average on its biggest one-day drop in three years and put the Nasdaq composite index in the red for 2006.

Stocks drifted in a narrow range through most of the session but took a sharp turn lower in the last hour of trading, when a market already nervous about interest rates was unsettled by comments from Federal Reserve Bank of St. Louis President William Poole, who reiterated that the central bank's future rate hikes will depend on economic conditions.

Concerns that rising inflation would send rates higher propelled the stock market sharply lower Wednesday, carrying the Dow down 214 points in the process.

Even before Poole's comments were reported on news services, investors were clearly not in a mood to buy. Data showing a moderating economy had little impact on trading, including an unexpected drop in the Conference Board's index of leading indicators and an upswing in jobless claims.

Meanwhile, a fresh rise in oil prices fueled inflation fears overshadowed the bond market's rebound and a stabilizing U.S. dollar after its recent tumble.

"This market is just scared right now," said Ryan Larson, an equity trader at Voyageur Asset Management. "People are taking money off the table and no bets are being made because no one knows what to do right now."

At the close, the Dow dropped 77.32, or 0.69 percent, to 11,128.29. On Wednesday, the Dow had its worst session since sinking 307 points on March 24, 2003; the index of 30 blue-chip stocks has lost 514 in the past six days.

Broader stock indicators also declined. The Standard & Poor's 500 index lost 8.51, or 0.67 percent, to 1,261.81, and the Nasdaq sank 15.48, or 0.7 percent, to 2,180.32.

Although yesterday's mild economic data did little for stocks, it brightened the bond market's outlook for interest rates. The yield on the 10-year Treasury note plunged to 5.06 percent from 5.16 percent late Wednesday.

The catalyst for the previous day's frenzied selling was a stronger-than-forecast jump in consumer prices that ignited concerns that the Fed might keep boosting interest rates amid signs that record energy costs are beginning to seep into other parts of the economy.

Nervousness that inflation and higher interest rates will choke U.S. consumer spending also weighed on stock markets in Asia. Japan's Nikkei stock average dropped 1.35 percent, its seventh losing day in the last eight sessions.