Market tumbles
on Fed worries

NEW YORK » New concerns about inflation from the Federal Reserve drove stocks sharply lower yesterday, adding to a spate of profit-taking that erased nearly a month of Wall Street's gains in the first two sessions of 2005.

According to the minutes of the Federal Open Market Committee's Dec. 14 meeting, a number of Fed officials said a drop in productivity growth, a weakening dollar and high oil prices could all contribute to inflation, and they hinted that interest rates may have to rise more aggressively to strengthen the dollar and curb inflation.

The Fed had been promising steady, measured hikes in rates; the benchmark federal funds rate stands at 2.25 percent following the Fed's quarter percentage point increase in December.

The release of the minutes led to a sharp drop in stock prices and a jump in trading volume, exacerbating losses in a session in which investors sold small-cap stocks and riskier investments for a second straight day.

"The Fed's comments really turned a day of light profit-taking into a day of significant profit-taking," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "Clearly, the way the market started off the new year will make investors nervous, and that could feed on itself over the next few days and drive things even lower before it settles down."

The Dow Jones industrial average fell 98.65, or 0.92 percent, to 10,630.78.

Broader stock indicators fell sharply. The Standard & Poor's 500 index lost 14.03, or 1.17 percent, to 1,188.05, and the Nasdaq composite index tumbled 44.29, or 2.06 percent, to 2,107.86, posting its biggest one-day decline since Aug. 6.

The losses over the past two days erased substantial gains from the past month, with the Dow and the S&P reaching their lowest levels since the second week of December and the Nasdaq falling to its lowest close since Nov. 30.

The selling was intensified by climbing oil prices, with tight supplies of heating oil and evidence that Saudi Arabia was cutting back on production blamed for the increase. A barrel of light crude settled at $43.91, up $1.79, on the New York Mercantile Exchange.

Krispy Kreme Doughnuts Inc. fell as a shareholder lawsuit alleged the troubled doughnut maker frequently padded its sales figures by overshipping doughnuts to its wholesalers, knowing that many would be returned. Krispy Kreme, which said it plans to restate earnings for its past fiscal year, lost $1.80 to $10.48.