Dow drops 140
as bond prices fall

NEW YORK -- Stocks sank sharply today, with investors securing more gains from the market's dramatic rebound as the Federal Reserve reignited worries about rising inflation and interest rates.

The Dow Jones industrial average, which closed at record highs on Monday and yesterday, gave back 139.67 points to close at 7,085.65, down from its nearly 500-point gain from the previous seven sessions.

Decliners led advancers by nearly a 2-to-1 margin on the New York Stock Exchange, with 849 up, 1,683 down and 829 unchanged. NYSE volume was 497.58 million shares vs. 601.30 million yesterday.

Broader stock indicators also retreated, weighed down by another weak day in the bond market, where long-term interest rates have been creeping back toward worrisome levels.

The Standard & Poor's 500 list fell 12.14 to 815.62, and the NYSE index dropped 5.82 to 424.95. The Nasdaq index fell 5.38 to 1,322.92, and the American Stock Exchange composite lost 0.01 to 570.50.

As bond prices slipped today, the yield on the 30-year Treasury -- a key influence on consumer and corporate borrowing costs -- rose to 6.96 percent from late yesterday's 6.89 percent.

Last week, the long-bond yield plunged below 7 percent for the first time in about a month amid indications that employment costs, the leading force behind inflation, have remained under control. The falling yield helped fuel a powerful rally in the stock market, which had tumbled weeks earlier after the Fed raised one of its key lending rates to ease inflationary pressures.

The bond market, which has been struggling this week to absorb a flood of new Treasury securities from the government's quarterly refinancing, pulled back today on more signals that inflation remains a threat.

The Labor Department reported today that U.S. productivity increased at a 2 percent annual rate in the first quarter, the best in more than three years, but the improvement was not as strong as some had hoped. Improving productivity enables companies to raise wages without raising prices because workers are producing more with the same amount of work.

Although the Fed is widely expected to raise rates again at a May 20 policy meeting, investors are concerned the central bank may tighten credit repeatedly, slowing consumer spending and company profits drastically.